Td 9916

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Federal Register / Vol. 85, No. 218 / Tuesday, November 10, 2020 / Rules and Regulations

DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9916]
RIN 1545–BP32

Additional First Year Depreciation
Deduction
Internal Revenue Service (IRS),
Treasury.
ACTION: Final regulations.
AGENCY:

This document contains final
regulations that provide guidance
regarding the additional first year
depreciation deduction under section
168(k) of the Internal Revenue Code
(Code). These final regulations reflect
and further clarify the increased
deduction and the expansion of
qualified property, particularly to
certain classes of used property,
authorized by the Tax Cuts and Jobs
Act. These final regulations generally
affect taxpayers who depreciate
qualified property acquired and placed
in service after September 27, 2017.
DATES: Effective date: These regulations
are effective on January 11, 2021.
Applicability dates: For dates of
applicability, see §§ 1.168(b)–1(b)(2)(iv),
1.168(k)–2(h), and 1.1502–68(e). See
SUPPLEMENTARY INFORMATION for an indepth discussion.
FOR FURTHER INFORMATION CONTACT:
Concerning §§ 1.168(b)–1 and 1.168(k)–
2, Elizabeth R. Binder at (202) 317–4869
or Kathleen Reed at (202) 317–4660 (not
toll-free numbers); concerning § 1.1502–
68, Samuel G. Trammell at (202) 317–
6975 or Katherine H. Zhang at (202)
317–5363 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:

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SUMMARY:

Applicability
A taxpayer may choose to apply
§§ 1.168(k)–2 and 1.1502–68 of these
final regulations, in their entirety, to
depreciable property acquired and
placed in service or certain plants
planted or grafted, as applicable, after
September 27, 2017, by the taxpayer
during a taxable year ending on or after
September 28, 2017, provided the
taxpayer consistently applies all rules in
these final regulations. However, once
the taxpayer applies §§ 1.168(k)–2 and
1.1502–68 of these final regulations for
a taxable year, the taxpayer must
continue to apply §§ 1.168(k)–2 and
1.1502–68 of these final regulations for
subsequent taxable years. Alternatively,
a taxpayer may rely on the proposed
regulations under section 168(k) in
REG–106808–19 (84 FR 50152; 2019–41

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I.R.B. 912), for depreciable property
acquired and placed in service or
certain plants planted or grafted, as
applicable, after September 27, 2017, by
the taxpayer during a taxable year
ending on or after September 28, 2017,
and ending before the taxpayer’s first
taxable year that begins on or after
January 1, 2021, if the taxpayer follows
the proposed regulations in their
entirety, except for § 1.168(k)–
2(b)(3)(iii)(B)(5), and in a consistent
manner.
Background
This document contains amendments
to the Income Tax Regulations (26 CFR
part 1) under sections 168(k) and 1502.
Section 168(k) allows an additional
first year depreciation deduction for
qualified property in the property’s
placed-in-service year. On December 22,
2017, section 168(k) was amended by
sections 12001(b)(13), 13201, and 13204
of Public Law 115–97 (131 Stat. 2054),
commonly referred to as the Tax Cuts
and Jobs Act (TCJA).
Section 13201 of the TCJA made
several significant amendments to the
additional first year depreciation
deduction provisions in section 168(k)
(additional first year depreciation
deduction). First, the additional first
year depreciation deduction percentage
was increased from 50 to 100 percent.
Second, the property eligible for the
additional first year depreciation
deduction was expanded, for the first
time, to include certain used
depreciable property and certain film,
television, or live theatrical
productions. Third, the placed-inservice date was extended from before
January 1, 2020, to before January 1,
2027 (and from before January 1, 2021,
to before January 1, 2028, for longer
production period property or certain
aircraft property described in section
168(k)(2)(B) or (C)). Fourth, the date on
which a specified plant may be planted
or grafted by the taxpayer was extended
from before January 1, 2020, to before
January 1, 2027. The provisions of
section 168(k), as amended by the TCJA,
are explained in greater detail in the
preamble to the final regulations
published by the Department of the
Treasury (Treasury Department) and the
IRS as TD 9874 on September 24, 2019
(2019 Final Regulations) in the Federal
Register (84 FR 50108).
Section 13201(h) of the TCJA provides
the effective dates of the amendments to
section 168(k) made by section 13201 of
the TCJA. Except as provided in section
13201(h)(2) of the TCJA, section
13201(h)(1) of the TCJA provides that
these amendments apply to property
acquired and placed in service after

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September 27, 2017. However, section
13201(h) of the TCJA also provides that
property is not treated as acquired after
the date on which a written binding
contract is entered into for such
acquisition. Section 13201(h)(2)
provides that the amendments apply to
specified plants planted or grafted after
September 27, 2017.
Additionally, section 12001(b)(13) of
the TCJA repealed section 168(k)(4),
relating to the election to accelerate
alternative minimum tax credits in lieu
of the additional first year depreciation
deduction, for taxable years beginning
after December 31, 2017. Further,
section 13204(a)(4)(B)(ii) repealed
section 168(k)(3), so that qualified
improvement property placed in service
after December 31, 2017, was not
eligible for the additional first year
depreciation deduction. However,
section 2307 of the Coronavirus Aid,
Relief, and Economic Security Act,
Public Law 116–136, 134 Stat. 281
(March 27, 2020) (CARES Act) amended
section 168(e)(3)(E) to provide that
qualified improvement property is
classified as 15-year property, thereby
providing a 15-year recovery period
under section 168(c) and making
qualified improvement property again
eligible for the additional first year
depreciation deduction, consistent with
the original intent of the TCJA. Section
2307 of the CARES Act is discussed in
greater detail in part II.B of the
Summary of Comments and Explanation
of Revisions section in this preamble.
Unless otherwise indicated, all
references to section 168(k) hereinafter
are references to section 168(k) as
amended by the TCJA.
On August 8, 2018, the Treasury
Department and the IRS published a
notice of proposed rulemaking (REG–
104397–18) in the Federal Register (83
FR 39292) containing proposed
regulations under section 168(k) (2018
Proposed Regulations). After full
consideration of the comments received
on the 2018 Proposed Regulations and
the testimony heard at the public
hearing on November 28, 2018, the
Treasury Department and the IRS
published the 2019 Final Regulations
adopting the 2018 Proposed Regulations
with modifications in response to such
comments and testimony.
Concurrently with the publication of
the 2019 Final Regulations, the Treasury
Department and the IRS published an
additional notice of proposed
rulemaking (REG–106808–19) in the
Federal Register (84 FR 50152)
withdrawing certain provisions of the
2018 Proposed Regulations and
proposing additional guidance under
section 168(k) (2019 Proposed

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Federal Register / Vol. 85, No. 218 / Tuesday, November 10, 2020 / Rules and Regulations
Regulations). The Summary of
Comments and Explanation of Revisions
section of this preamble summarizes the
provisions of the 2019 Proposed
Regulations, which are explained in
greater detail in the preamble to the
2019 Proposed Regulations.
The Treasury Department and the IRS
received written and electronic
comments responding to the 2019
Proposed Regulations and held a public
hearing on the 2019 Proposed
Regulations on November 13, 2019.
After full consideration of the comments
received on the 2019 Proposed
Regulations and the testimony heard at
the public hearing, this Treasury
decision adopts the 2019 Proposed
Regulations with modifications in
response to certain comments and
testimony, as described in the Summary
of Comments and Explanation of
Revisions section.

the definition of qualified property, (2)
rules for consolidated groups, (3) rules
regarding components acquired or selfconstructed after September 27, 2017,
for larger self-constructed property for
which manufacture, construction, or
production began before September 28,
2017, (4) rules regarding the application
of the mid-quarter convention, as
determined under section 168(d), and
(5) changes to the definitions in the
2019 Final Regulations for the terms
qualified improvement property,
predecessor, and class of property. Also,
the rules for consolidated groups have
been moved from § 1.168(k)–2(b)(3)(v) of
the 2019 Proposed Regulations to new
§ 1.1502–68 of these final regulations.
Part I of this Background section
addresses operational rules. Part II of
this Background section addresses
definitions.

Summary of Comments and
Explanation of Revisions
The Treasury Department and the IRS
received written comments from five
commenters in response to the 2019
Proposed Regulations. In connection
with these comments, some commenters
also provided comments on aspects of
the 2019 Final Regulations. All
comments were considered and are
available at https://www.regulations.gov
or upon request. The comments
addressing the 2019 Proposed
Regulations and 2019 Final Regulations
are summarized in this Summary of
Comments and Explanation of Revisions
section.
Because of the amendments to section
168(k) by the TCJA, the 2019 Final
Regulations updated existing
regulations in § 1.168(k)–1 by providing
a new section at § 1.168(k)–2 for
property acquired and placed in service
after September 27, 2017. The 2019
Final Regulations also made conforming
amendments to the existing regulations.
The 2019 Final Regulations described
and clarified the statutory requirements
that must be met for depreciable
property to qualify for the additional
first year depreciation deduction
provided by section 168(k), and they
provided guidance to taxpayers in
determining the additional first year
depreciation deduction and the amount
of depreciation otherwise allowable for
this property.
These final regulations provide
taxpayers with guidance regarding
issues relating to the application of
section 168(k) that are not addressed in
the 2019 Final Regulations, along with
clarifying changes to the 2019 Final
Regulations. Specifically, these final
regulations provide (1) rules relevant to

A. Property Described in Section
168(k)(9)(B)
Section 1.168(k)–2(b)(2)(ii)(G) of the
2019 Proposed Regulations provides
that, for purposes of section
168(k)(9)(B), floor plan financing
interest is not taken into account for the
taxable year by a trade or business that
has had floor plan financing
indebtedness if the sum of the amounts
calculated under section 163(j)(1)(A)
and (B) for the trade or business for the
taxable year equals or exceeds the
business interest (which includes floor
plan financing interest), as defined in
section 163(j)(5), of the trade or business
for the taxable year. If the business
interest, which includes floor plan
financing interest, exceeds the sum of
the amounts calculated under section
163(j)(1)(A) and (B) for the taxable year,
the floor plan financing interest is taken
into account for the taxable year for
purposes of section 168(k)(9)(B). See
Example 7 in § 1.168(k)–2(b)(2)(iii)(G) of
the 2019 Proposed Regulations. Floor
plan financing indebtedness is defined
in section 163(j)(9)(B) and § 1.163(j)–
1(b)(18) as indebtedness that is (i) used
to finance the acquisition of motor
vehicles held for sale or lease; and (ii)
secured by the motor vehicles so
acquired. Floor plan financing interest
expense is defined in section
163(j)(9)(A) and § 1.163(j)–1(b)(19) as
interest paid or accrued on floor plan
financing indebtedness.
A commenter on the 2019 Proposed
Regulations requested that these final
regulations allow a trade or business
that has business interest expense,
including floor plan financing interest
expense, that exceeds the sum of the
amounts calculated under section

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I. Operational Rules

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163(j)(1)(A) and (B) for the taxable year,
to choose to limit its interest expense
deduction to the sum of the amounts
under section 163(j)(1)(A) and (B), and
not be precluded by section 168(k)(9)(B)
from claiming the additional first year
depreciation deduction. The Treasury
Department and the IRS do not interpret
section 163(j)(1) as allowing such an
option. Consistent with the plain
language of section 163(j)(1), § 1.163(j)–
2(b)(1) provides that the amount
allowed as a deduction for business
interest expense for the taxable year
generally cannot exceed the sum of (1)
the taxpayer’s business interest income
for the taxable year, (2) 30 percent of the
taxpayer’s adjusted taxable income for
the taxable year, and (3) the taxpayer’s
floor plan financing interest expense for
the taxable year. Pursuant to section
2306(a) of the CARES Act, the adjusted
taxable income percentage is increased
from 30 to 50 percent for any taxable
year beginning in 2019 or 2020, subject
to certain exceptions. Because neither
section 163(j)(1) nor § 1.163(j)–2(b)
provide an option for a trade or business
with floor plan financing indebtedness
to include or exclude its floor plan
financing interest expense in
determining the amount allowed as a
deduction for business interest expense
for the taxable year, the Treasury
Department and the IRS decline to
adopt this comment.
The commenter also requested that
the Treasury Department and the IRS
provide transition relief for taxpayers
that treated, on their 2018 Federal
income tax returns, section 163(j)(1) as
providing an option for a trade or
business with floor plan financing
indebtedness to include or exclude its
floor plan financing interest expense in
determining the amount allowed as a
deduction for business interest expense
for the taxable year. Further, the
commenter requested transition relief
for taxpayers with a trade or business
with floor plan financing indebtedness
that want to revoke their elections not
to claim the additional first year
depreciation for property placed in
service during 2018 in order to rely on
the 2019 Proposed Regulations. The
Treasury Department and the IRS intend
to issue published guidance that will
address these requests.
B. Used Property
1. Depreciable Interest
a. Five-Year Safe Harbor
Section 1.168(k)–2(b)(3)(iii)(B)(1) of
the 2019 Final Regulations provides that
property is treated as used by the
taxpayer or a predecessor at any time
prior to acquisition by the taxpayer or

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predecessor if the taxpayer or the
predecessor had a depreciable interest
in the property at any time prior to such
acquisition, whether or not the taxpayer
or the predecessor claimed depreciation
deductions for the property. To
determine if the taxpayer or a
predecessor had a depreciable interest
in the property at any time prior to
acquisition, the 2019 Final Regulations
also provide that only the five calendar
years immediately prior to the
taxpayer’s current placed-in-service year
of the property are taken into account
(Five-Year Safe Harbor). If the taxpayer
and a predecessor have not been in
existence for this entire five-year period,
the 2019 Final Regulations provide that
only the number of calendar years the
taxpayer and the predecessor have been
in existence are taken into account.
Commenters requested clarification
that the Five-Year Safe Harbor applies
for purposes of the special rules for
consolidated groups in § 1.168(k)–
2(b)(3)(v) of the 2019 Proposed
Regulations. A commenter also
requested clarification whether ‘‘the
partnership’s current year’’ in
§ 1.168(k)–2(b)(3)(iii)(B)(5) of the 2019
Proposed Regulations (Partnership
Lookthrough Rule) is the taxable year or
the calendar year. These comments are
addressed later in this Summary of
Comments and Explanation of Revisions
section.
In connection with comments
received on the Five-Year Safe Harbor
and the Partnership Lookthrough Rule,
the Treasury Department and the IRS
reviewed the Five-Year Safe Harbor and
determined that clarification of this safe
harbor would be beneficial. One
commenter requested clarification of the
Five-Year Safe Harbor as to: (1) Whether
the ‘‘placed-in-service year’’ is the
taxable year or the calendar year; and (2)
whether the portion of the calendar year
covering the period up to the placed-inservice date of the property is taken into
account. The commenter also requested
clarification regarding the application of
the Five-Year Safe Harbor to situations
where the taxpayer or a predecessor was
not in existence during the entire 5-year
lookback period. Specifically, the
commenter pointed out that the safe
harbor in the 2019 Final Regulations
could be read to apply only to those
periods in the 5-year lookback period
that both the taxpayer and a predecessor
are in existence, and not to those
periods in the 5-year lookback period
during which the taxpayer or a
predecessor, or both, were in existence
and had a depreciable interest in the
property later acquired and placed in
service by the taxpayer. The commenter
suggested that the Five-Year Safe Harbor

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be clarified to say that the taxpayer and
each predecessor is subject to a separate
lookback period that begins no earlier
than the date such person came into
existence.
The Treasury Department and the IRS
intended the ‘‘placed-in-service year’’ to
be the current calendar year in which
the property is placed in service by the
taxpayer. Also, the Treasury Department
and the IRS intended the portion of that
calendar year covering the period up to
the placed-in-service date of the
property to be considered in
determining whether the taxpayer or a
predecessor previously had a
depreciable interest. This approach is
consistent with an exception to the de
minimis use rule in § 1.168(k)–
2(b)(3)(iii)(B)(4) of the 2019 Proposed
Regulations, which is discussed in
greater detail in part I.B.1.b of this
Summary of Comments and Explanation
of Revisions section. Pursuant to that
exception, when a taxpayer places in
service eligible property in Year 1,
disposes of that property to an unrelated
party in Year 1 within 90 calendar days
of that placed-in-service date, and then
reacquires the same property later in
Year 1, the taxpayer is treated as having
a prior depreciable interest in the
property upon the taxpayer’s
reacquisition of the property in Year 1.
This rule would be superfluous if the
Five-Year Safe Harbor did not consider
the portion of the calendar year covering
the period up to the placed-in-service
date of the property.
Accordingly, § 1.168(k)–
2(b)(3)(iii)(B)(1) is amended to clarify
that the five calendar years immediately
prior to the current calendar year in
which the property is placed in service
by the taxpayer, and the portion of such
current calendar year before the placedin-service date of the property
determined without taking into account
the applicable convention, are taken
into account to determine if the
taxpayer or a predecessor had a
depreciable interest in the property at
any time prior to acquisition (lookback
period). Section 1.168(k)–
2(b)(3)(iii)(B)(1) also is amended to
adopt the suggestion of the commenter
that each of the taxpayer and the
predecessor be subject to a separate
lookback period. These final regulations
clarify that if the taxpayer or a
predecessor, or both, have not been in
existence during the entire lookback
period, then only the portion of the
lookback period during which the
taxpayer or a predecessor, or both, have
been in existence is taken into account
to determine if the taxpayer or the
predecessor had a depreciable interest
in the property. More examples have

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been added to clarify the application of
the Five-Year Safe Harbor.
b. De Minimis Use
Section 1.168(k)–2(b)(3)(iii)(B)(4) of
the 2019 Proposed Regulations provides
an exception to the prior depreciable
interest rule in the 2019 Final
Regulations when the taxpayer disposes
of property to an unrelated party within
90 calendar days after the taxpayer
originally placed such property in
service (De Minimis Use Rule). The
2019 Proposed Regulations also provide
that the De Minimis Use Rule does not
apply if the taxpayer reacquires and
again places in service the property
during the same taxable year the
taxpayer disposed of the property. A
commenter on the 2019 Proposed
Regulations asked for clarification
regarding the application of the De
Minimis Use Rule in the following
situations:
(1) The taxpayer places in service
property in Year 1, disposes of that
property to an unrelated party in Year
1 within 90 calendar days of that
original placed-in-service date, and then
reacquires and again places in service
the same property later in Year 1 and
does not dispose of the property again
in Year 1;
(2) The taxpayer places in service
property in Year 1, disposes of that
property to an unrelated party in Year
2 within 90 calendar days of that
original placed-in-service date, and then
reacquires and again places in service
the same property in Year 2 or later; and
(3) The taxpayer places in service
property in Year 1 and disposes of that
property to an unrelated party in Year
1 within 90 calendar days of that
original placed-in-service date, then the
taxpayer reacquires and again places in
service the same property later in Year
1 and disposes of that property to an
unrelated party in Year 2 within 90
calendar days of the subsequent placedin-service date in Year 1, and the
taxpayer reacquires and again places in
service the same property in Year 4.
In situation 1, the additional first year
depreciation deduction is not allowable
for the property when it was initially
placed in service in Year 1 by the
taxpayer pursuant to § 1.168(k)–
2(g)(1)(i) of the 2019 Final Regulations.
The additional first year depreciation
deduction also is not allowable when
the same property is subsequently
placed in service in Year 1 by the same
taxpayer under the De Minimis Use
Rule in the 2019 Proposed Regulations.
The commenter asserted that the
additional first year depreciation
deduction should be allowable for the
property when it is placed in service

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again in Year 1 and is not disposed of
again in Year 1, because the additional
first year depreciation deduction is not
allowable for the property when it
initially was placed in service in Year
1 by the taxpayer. The Treasury
Department and the IRS agree with this
comment if the property is originally
acquired by the taxpayer after
September 27, 2017. The Treasury
Department and the IRS decline to
adopt this comment with respect to
property that was originally acquired by
the taxpayer before September 28, 2017,
as the exception to the De Minimis Use
Rule was intended to prevent certain
churning transactions involving such
property. The Treasury Department and
the IRS believe that property that is
placed in service, disposed of, and
reacquired in the same taxable year is
more likely to be part of a
predetermined churning plan.
In situation 2, the additional first year
depreciation deduction is allowable for
the same property by the same taxpayer
twice (in Year 1 when the property is
initially placed in service, and in Year
2 when the property is placed in service
again). This result is consistent with the
De Minimis Use Rule in the 2019
Proposed Regulations, and this result is
not changed in these final regulations.
In situation 3, the De Minimis Use
Rule provides only one 90-day period
that is disregarded in determining
whether the taxpayer had a depreciable
interest in the property prior to its
reacquisition. That 90-day period is
measured from the original placed-inservice date of the property by the
taxpayer. As a result, the second 90-day
period in situation 3 (during which the
taxpayer reacquired the property in Year
1, again placed it in service in Year 1,
and then disposed of it in Year 2) is
taken into account in determining
whether the taxpayer previously used
the property when the taxpayer again
places in service the property in Year 4.
The De Minimis Use Rule in these
final regulations is clarified to reflect
these results. These final regulations
also include additional examples to
illustrate the application of the De
Minimis Use Rule in these situations
and conforming changes to § 1.168(k)–
2(g)(1)(i) of the 2019 Final Regulations.
2. Application to Partnerships
The Treasury Department and the IRS
received several comments regarding
the Partnership Lookthrough Rule in
§ 1.168(k)–2(b)(3)(iii)(B)(5) of the 2019
Proposed Regulations, which addresses
the extent to which a partner is deemed
to have a depreciable interest in
property held by a partnership. The
Partnership Lookthrough Rule provides

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that a person is treated as having a
depreciable interest in a portion of
property prior to the person’s
acquisition of the property if the person
was a partner in a partnership at any
time the partnership owned the
property. The Partnership Lookthrough
Rule further provides that the portion of
property in which a partner is treated as
having a depreciable interest is equal to
the total share of depreciation
deductions with respect to the property
allocated to the partner as a percentage
of the total depreciation deductions
allocated to all partners during the
current calendar year and the five
calendar years immediately prior to the
partnership’s current year.
One commenter requested that the
Treasury Department and the IRS
withdraw the Partnership Lookthrough
Rule and replace it with a rule that
treats a taxpayer as having a depreciable
interest in an item of property only if
the taxpayer was a controlling partner in
a partnership at any time the
partnership owned the property during
the applicable lookback period. The
Treasury Department and the IRS agree
with the commenter that the Partnership
Lookthrough Rule should be withdrawn.
The Treasury Department and the IRS
have determined that the complexity of
applying the Partnership Lookthrough
Rule would place a significant
administrative burden on both taxpayers
and the IRS. For this reason, these final
regulations do not retain the Partnership
Lookthrough Rule. Therefore, under
these final regulations, a partner will
not be treated as having a depreciable
interest in partnership property solely
by virtue of being a partner in the
partnership. The Treasury Department
and the IRS have determined that a
replacement rule that applies only to
controlling partners is not necessary
because the related party rule in section
179(d)(2)(A) applies to a direct purchase
of partnership property by a current
majority partner, and the series of
related transactions rules in § 1.168(k)–
2(b)(3)(iii)(C) prevents avoidance of the
related party rule through the use of
intermediary parties.
The same commenter recommended a
number of changes to the Partnership
Lookthrough Rule if it were to be
retained. It is not necessary to address
these comments, because these final
regulations do not retain the Partnership
Lookthrough Rule.
Additionally, one commenter
recommended that the Treasury
Department and the IRS clarify the
operation of the section 168(k)
regulations with respect to section
743(b) adjustments after transfers of
partnership interests in section 168(i)(7)

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71737

transactions, as described in the 2019
Final Regulations. The Treasury
Department and the IRS have
determined that this comment is outside
of the scope of these final regulations.
3. Series of Related Transactions
Section 1.168(k)–2(b)(3)(iii)(C) of the
2019 Proposed Regulations provides
special rules for a series of related
transactions (Proposed Related
Transactions Rule). The Proposed
Related Transactions Rule generally
provides that the relationship between
the parties under section 179(d)(2)(A) or
(B) in a series of related transactions is
tested immediately after each step in the
series, and between the original
transferor and the ultimate transferee
immediately after the last transaction in
the series. The Proposed Related
Transactions Rule also provides that the
relationship between the parties in a
series of related transactions is not
tested in certain situations. For
example, a party in the series that is
neither the original transferor nor the
ultimate transferee is disregarded in
applying the relatedness test if the party
placed in service and disposed of the
property in the party’s same taxable year
or did not place the property in service.
The relationship between the parties
also is not tested if the step is a
transaction described in § 1.168(k)–
2(g)(1)(iii) (that is, a transfer of property
in a transaction described in section
168(i)(7) in the same taxable year that
the property is placed in service by the
transferor). Finally, the 2019 Proposed
Regulations provide that the Proposed
Related Transactions Rule does not
apply to syndication transactions or
when all transactions in the series are
described in § 1.168(k)–2(g)(1)(iii).
A commenter stated that the Proposed
Related Transactions Rule may
disregard significant relationships that
existed before the series, or that are
formed as a result of the series. The
commenter also stated that the rule does
not address how relatedness should be
tested when the relationship between
the parties changes over the course of
the series or when a party ceases to
exist.
The commenter recommended that
the final regulations test relatedness
immediately before the first step in the
series of related transactions and
immediately after the last step in the
series, similar to § 1.197–2(h)(6)(ii)(B).
The commenter also recommended
simplifying the Proposed Related
Transactions Rule and alleviating
knowledge burdens imposed on
transferees and the IRS as to whether a
transfer is pursuant to a series of related
transactions, the date that a transferee in

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a series placed the asset in service, and
whether a transferee is related to a
transferor.
The Treasury Department and the IRS
have determined that the rule in
§ 1.197–2(h)(6)(ii)(B) is not appropriate
for testing relatedness for purposes of
the additional first year depreciation
deduction. Section 1.197–2(h)(6)(ii)(B)
provides that relatedness is tested
immediately before the first step in a
series of related transactions and
immediately after the last step in the
series. The purpose of this rule is to
prevent the churning of assets, and the
relationship that is of importance is that
of the first and last acquisition. In
contrast, the purpose of the Proposed
Related Transactions Rule is to
determine whether each transferee in
the series qualifies to claim the
additional first year depreciation
deduction for the assets and, therefore,
testing for relatedness is done
immediately after each step in the
series. Testing for relatedness at no
point in time other than immediately
before the first step and immediately
after the last step in the series would
preclude all intermediaries in the series
from claiming the additional first year
depreciation deduction. Accordingly,
the Treasury Department and the IRS do
not adopt this recommendation.
The commenter also recommended
several alternative approaches to testing
relatedness: (1) Any transferee in a
series of related transactions tests its
relatedness to every prior transferor in
the series; or (2) a transferee tests its
relatedness only to its immediate
transferor if the transferee demonstrated
that it did not know, or have reason to
know, that the transfer occurred
pursuant to a series of related
transactions.
The Treasury Department and the IRS
have determined that requiring each
transferee in a series of related
transactions to test its relatedness to
every prior transferor in the series
would impose a significant
administrative burden. Therefore, these
final regulations do not adopt the
commenter’s first alternative approach.
The Treasury Department and the IRS
also have determined that, because a
series of related transactions generally is
undertaken among the relevant parties
pursuant to a preconceived plan, the
rule in the commenter’s second
alternative approach would have
limited application. Because the
application of this approach would
depend upon the taxpayer’s
demonstration that it did not know, and
did not have reason to know, that a
transfer occurred pursuant to a series,
this rule also may be difficult for both

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taxpayers and the IRS to administer.
Furthermore, this approach fails to
adequately address situations where the
parties other than the original transferor
and the ultimate transferee in a series
may be related or may become related
pursuant to the series. Thus, these final
regulations do not adopt the
commenter’s second alternative
approach.
However, the Treasury Department
and the IRS agree that the Proposed
Related Transactions Rule should be
simplified. The Treasury Department
and the IRS also agree that this rule
should be modified to take into account
changes in the relationship between the
parties, including a party ceasing to
exist, over the course of a series of
related transactions. For example,
assume that, pursuant to a series of
related transactions, A transfers
property to B, B transfers property to C,
and C transfers property to D. Under the
Proposed Related Transactions Rule,
relatedness is tested after each step and
between D and A. Assume further that,
at the beginning of the series, C was
related to A but, prior to acquiring the
property, C ceases to be related to A, or
A ceases to exist. The Proposed Related
Transactions Rule does not address how
to treat such changes.
Accordingly, these final regulations
provide that each transferee in a series
of related transactions tests its
relationship under section 179(d)(2)(A)
or (B) with the transferor from which
the transferee directly acquires the
depreciable property (immediate
transferor) and with the original
transferor of the depreciable property in
the series. The transferee is treated as
related to the immediate transferor or
the original transferor if the relationship
exists either immediately before the first
transfer of the depreciable property in
the series or when the transferee
acquires the property. Any transferor in
a series of related transactions that
ceases to exist during the series is
deemed to continue to exist for
purposes of testing relatedness.
These final regulations also provide a
special rule that disregards certain
transitory relationships created
pursuant to a series of related
transactions. More specifically, if a
party acquires depreciable property in a
series of related transactions in which
the acquiring party acquires stock,
meeting the requirements of section
1504(a)(2), of a corporation in a fully
taxable transaction, followed by a
liquidation of the acquired corporation
under section 331, any relationship
created as part of such series of
transactions is disregarded in
determining whether any party is

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related to such acquired corporation for
purposes of testing relatedness. This
rule is similar to § 1.197–2(h)(6)(iii) and
properly reflects the change in
ownership of depreciable property in a
series of related transactions without
taking into account certain transitory
relationships the purpose of which is
unrelated to the additional first year
depreciation deduction.
Finally, these final regulations
provide that, if a transferee in a series
of related transactions acquires
depreciable property from a transferor
that was not in existence immediately
prior to the first transfer of the property
in the series (new transferor), the
transferee tests its relationship with the
party from which the new transferor
acquired the depreciable property.
Examples illustrating these revised rules
are provided in these final regulations.
4. Application to Members of a
Consolidated Group
a. The 2019 Proposed Regulations
The 2019 Proposed Regulations
provide special rules addressing the
availability of the additional first year
depreciation deduction upon the
acquisition of depreciable property by a
member of a consolidated group, as
defined in § 1.1502–1(b) and (h),
respectively. Under the 2019 Proposed
Regulations, if a member acquires
property in which the consolidated
group had a depreciable interest at any
time prior to the member’s acquisition
of such property, then the member is
treated as previously having a
depreciable interest in such property
(Group Prior Use Rule). This rule was
first included in the 2018 Proposed
Regulations to address situations in
which property is disposed of by one
member of a consolidated group and
subsequently is acquired by another
member of the same consolidated group,
because the Treasury Department and
the IRS had determined that allowing
the additional first year depreciation
deduction in such situations would not
clearly reflect the income of the
consolidated group. See 83 FR 39292,
39295 (Aug. 8, 2018). For purposes of
the Group Prior Use Rule, a
consolidated group is treated as having
a depreciable interest in property during
the time any current or former member
of the group had a depreciable interest
while a member of the group. See
§ 1.168(k)–2(b)(3)(v)(A) of the 2019
Proposed Regulations.
Further, when members of a
consolidated group acquire both
depreciable property and the stock of a
corporation that previously had a
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pursuant to the same series of related
transactions, the 2019 Proposed
Regulations treat the member that
acquires the property as previously
having a depreciable interest in such
property (Stock and Asset Acquisition
Rule). See § 1.168(k)–2(b)(3)(v)(B) of the
2019 Proposed Regulations. Like the
Group Prior Use Rule, the Stock and
Asset Acquisition Rule initially was
included in the 2018 Proposed
Regulations. As stated in the preamble
to those regulations, the Treasury
Department and the IRS have
determined that, in substance, this
series of related transactions is the same
as a series of related transactions in
which a consolidated group acquired
the selling corporation, which
subsequently reacquired the property in
which it previously had a depreciable
interest and then transferred it to
another member of the consolidated
group. In that situation, the additional
first year depreciation deduction would
not be allowed. See 83 FR 39292, 39295
(Aug. 8, 2018). Both the Group Prior Use
Rule and the Stock and Asset
Acquisition Rule are adopted in these
final regulations with certain
modifications, as discussed further in
part I.B.4.b(2) of this Summary of
Comments and Explanation of Revisions
section.
The 2019 Proposed Regulations also
include rules addressing transfers of
depreciable property between members
of the same consolidated group. One
such rule (Proposed Consolidated Asset
Acquisition Rule) applies if a member
(transferee member) acquires
depreciable property from another
member of the same consolidated group
in a taxable transaction and, as part of
the same series of related transactions,
the transferee member then ceases to be
a member of that group within 90
calendar days of the date of the property
acquisition. Under the Proposed
Consolidated Asset Acquisition Rule,
the transferee member is treated as (1)
acquiring the property one day after the
date on which the transferee member
ceases to be a member of the
consolidated group (Deconsolidation
Date) for all Federal income tax
purposes, and (2) placing the property
in service no earlier than one day after
the Deconsolidation Date for purposes
of depreciation and the investment
credit allowed by section 38. See
§ 1.168(k)–2(b)(3)(v)(C) of the 2019
Proposed Regulations.
The Treasury Department and the IRS
also determined that, in general,
deemed acquisitions of property
pursuant to a section 338 election or a
section 336(e) election should be subject
to the same treatment as actual

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acquisitions of property because such
deemed acquisitions generally are
respected as actually occurring for
Federal income tax purposes. See
§§ 1.336–2(e) and 1.338–1(a)(2); see also
§ 1.336–1(a)(1) (generally providing that,
except to the extent inconsistent with
section 336(e), the results of section
336(e) should coincide with those of
section 338(h)(10)). Accordingly, the
Treasury Department and the IRS
proposed a rule analogous to the
Proposed Consolidated Asset
Acquisition Rule for deemed
acquisitions of property pursuant to
such an election (Proposed
Consolidated Deemed Acquisition Rule,
and together with the Proposed
Consolidated Asset Acquisition Rule,
the Proposed Consolidated Acquisition
Rules).
Section 338 and section 336(e) both
provide elections to treat certain
transfers of a target corporation’s stock
as transfers of the target corporation’s
assets. If a section 338 election is made
for a ‘‘qualified stock purchase’’ (QSP),
then the target corporation generally is
treated as two separate corporations
before and after the acquisition date for
Federal income tax purposes. As a result
of the election, ‘‘old target’’ is deemed
to sell its assets to an unrelated person
at the close of the acquisition date at fair
market value, and ‘‘new target’’ is
deemed to acquire those assets from an
unrelated person at the beginning of the
following day. See section 338(a). If the
election is a section 338(h)(10) election,
then old target is deemed to liquidate
following the deemed sale of its assets.
See § 1.338–1(a)(1).
Generally, a similar sale and
liquidation are deemed to occur if a
section 336(e) election is made for a
‘‘qualified stock disposition’’ (QSD) of
target corporation stock. However, if a
section 336(e) election is made for a
QSD described in section 355(d)(2) or
(e)(2), then a different transaction is
deemed to occur. In that case, old target
is deemed to sell its assets to an
unrelated party and then reacquire those
assets from an unrelated party, and old
target is not deemed to liquidate (saleto-self model). See § 1.336–2(b).
The Proposed Consolidated Deemed
Acquisition Rule changes certain
aspects of the deemed acquisitions that
result from a section 338 election or a
section 336(e) election. This proposed
rule applies if a member (transferee
member) acquires, in a QSP or QSD,
stock of another member (target) that
holds depreciable property and, as part
of the same series of related
transactions, the transferee member and
target cease to be members of the selling
consolidated group within 90 calendar

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71739

days of the QSP or QSD. Under this
proposed rule, (1) the acquisition date
or disposition date, as applicable, is
treated as the day that is one day after
the Deconsolidation Date for all Federal
income tax purposes, and (2) new target
is treated as placing the property in
service no earlier than one day after the
Deconsolidation Date for purposes of
depreciation and the investment credit
allowed by section 38. The Proposed
Consolidated Deemed Acquisition Rule
does not apply to QSDs described in
section 355(d)(2) or (e)(2). See
§ 1.168(k)–2(b)(3)(v)(D) of the 2019
Proposed Regulations.
b. Comments on Consolidated Group
Rules in the 2019 Proposed Regulations
The Treasury Department and the IRS
received comments regarding the
foregoing consolidated group rules in
the 2019 Proposed Regulations.
(1) The Proposed Consolidated
Acquisition Rules
(a) Issues Under the Proposed
Consolidated Acquisition Rules
The Proposed Consolidated
Acquisition Rules were intended to
make the additional first year
depreciation deduction available to the
buyer of depreciable property in an
intercompany transaction, as defined in
§ 1.1502–13(b)(1)(i), if the buyer
member leaves the consolidated group
within 90 calendar days pursuant to the
same series of related transactions that
includes the property acquisition. As
discussed in the preamble to the 2019
Proposed Regulations, the Treasury
Department and the IRS have
determined that, in substance, such a
transaction should be treated the same
as if the buyer member first left the
consolidated group and then purchased
the depreciable property (in which case
the buyer member would be allowed to
claim the additional first year
depreciation deduction). See 84 FR
50152, 50156 (Sep. 24, 2019). Treating
the property acquisition as occurring
after the buyer member leaves the
consolidated group reduces the
likelihood that the transfer fails to
satisfy the ‘‘purchase’’ requirements in
section 179(d)(2) and (3), helps ensure
that the buyer member is not attributed
the seller member’s prior use of the
property, and precludes the application
of section 168(i)(7).
Commenters appreciated the
Proposed Consolidated Acquisition
Rules. However, commenters also
argued that, because these rules treat
certain actual or deemed asset
acquisitions as occurring on a date that
is different than the date on which the

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acquisitions occurred up to 90 calendar
days after the date of such an
acquisition for all Federal income tax
purposes, these rules create some
uncertainty and raise certain
implementation issues.
Many of the questions raised by
commenters regarding the Proposed
Consolidated Acquisition Rules concern
the period beginning on the date of the
actual or deemed asset acquisition and
ending on the Deconsolidation Date
(interim period). In particular,
commenters noted that tax items may
arise during the interim period from
both the depreciable property acquired
by the transferee member and the
consideration received by the transferor
member. Commenters asked how
income, deductions, or other tax items
from the transferred depreciable
property during the interim period
should be reported, particularly if the
asset acquisition occurs in one taxable
year and the Deconsolidation Date
occurs in the subsequent taxable year.
Additionally, commenters suggested
that the consideration used to acquire
depreciable property from the transferor
member may consist of stock or debt
instruments that produce dividends or
interest during the interim period.
According to commenters, the Proposed
Consolidated Acquisition Rules do not
address how such income should be
reported. Commenters also asked how
changes in the depreciable property (or
the seller consideration) during the
interim period—such as a change in
value, or a change in use that affects
eligibility for the additional first year
depreciation deduction—should be
taken into account, and how tax items
associated with the property should be
reported if the transferor member leaves
the selling group during the interim
period.
Commenters also raised questions
about the interim period relating
specifically to the Proposed
Consolidated Deemed Acquisition Rule.
Commenters noted that additional
transaction steps, such as property
transfers by the transferee member to
target, or the assumption of additional
liabilities of the transferee member by
target, may occur between the date of
the QSP and the Deconsolidation Date.
If these transaction steps occur,
commenters asked whether the
aggregate deemed sale price (ADSP) and
adjusted grossed-up basis (AGUB) (see
§§ 1.338–4 and 1.338–5, respectively)
are adjusted and, if so, how.
Additionally, commenters asked
about the interaction of the Proposed
Consolidated Acquisition Rules with
section 355. More specifically, if the
transferee member is relying on the

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acquired assets to satisfy the ‘‘active
trade or business’’ requirements of
section 355(b) in connection with the
distribution of the transferee member’s
stock, commenters asked whether the
Proposed Consolidated Acquisition
Rules could prevent the distribution
from qualifying under section 355
because the asset acquisition would be
treated as occurring one day after the
transferee member has left the selling
group. See section 355(b)(1)(A)
(providing that the distributing
corporation and the controlled
corporation must be ‘‘engaged
immediately after the distribution in the
active conduct of a trade or business’’).
The Treasury Department and the IRS
appreciate the comments received with
regard to the Proposed Consolidated
Acquisition Rules. The Treasury
Department and the IRS agree that these
proposed rules could create uncertainty
and raise implementation issues. As a
result, these final regulations adopt an
alternative approach (Delayed Bonus
Approach) that would alleviate many of
the concerns raised by commenters. See
the discussion in part I.B.4.b(1)(e) of
this Summary of Comments and
Explanation of Revisions section.
(b) The 90-Day Requirement
The Proposed Consolidated
Acquisition Rules apply only if, as part
of the same series of related
transactions, the transferee member
leaves (or, in the case of a deemed asset
purchase, the transferee member and
target leave) the transferor member’s
consolidated group within 90 calendar
days of the date of the property
acquisition (90-day requirement). See
part I.B.4.a of this Summary of
Comments and Explanation of Revisions
section. The 90-day requirement was
based in part on the rule for syndication
transactions in section 168(k)(2)(E)(iii)
and § 1.168(k)–2(b)(3)(vi) and (b)(4)(iv).
By capping the period of time that could
elapse between the property transfer
date and the Deconsolidation Date, the
90-day requirement was intended to
limit the scope of certain issues created
by treating the asset acquisition as
occurring after the actual transfer date
under the Proposed Consolidated
Acquisition Rules. See the discussion in
part I.B.4.b(1)(a) of this Summary of
Comments and Explanation of Revisions
section.
The Treasury Department and the IRS
received several comments
recommending the elimination of the
90-day requirement. The commenters
generally argued that, in many cases, the
90-day requirement will be difficult for
taxpayers to satisfy. In business
transactions, an intercompany asset

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transfer may be a preparatory step
undertaken well in advance of the
Deconsolidation Date, particularly if the
transaction involves the transfer of legal
title to assets. Additionally, delays in
regulatory approval for the transaction
may preclude the transferee member
from leaving the consolidated group
within 90 days. Moreover, one
commenter argued that the rationale for
the 90-day requirement for syndication
transactions differs from the rationale
for such a requirement in the Proposed
Consolidated Acquisition Rules. The
commenter noted that the syndication
exception in section 168(k)(2)(E)(iii)
specifies a period of time that
ownership of an asset (rather than the
relationship between the transferor and
transferee, as in the Proposed
Consolidated Acquisition Rules) should
be disregarded, and the commenter
suggested that the primary authority for
disregarding periods of transitory
ownership is the step transaction
doctrine rather than section 168(k).
Commenters also suggested that the 90day requirement does not further the
policy goals of section 168(k). In other
words, so long as there is a series of
related transactions, whether the asset
acquisition and the deconsolidation
occur within 90 days should not be
determinative. Based on the foregoing,
the commenters recommended
removing the 90-day requirement and
simply retaining the ‘‘series of related
transactions’’ requirement.
The Treasury Department and the IRS
agree with commenters that the 90-day
requirement would be difficult for
taxpayers to satisfy in many ordinarycourse business transactions. The
Treasury Department and the IRS also
have determined that the Delayed Bonus
Approach would eliminate many of the
aforementioned issues with the
Proposed Consolidated Acquisition
Rules by respecting the date on which
each transaction in the series actually
occurs. Consequently, the Delayed
Bonus Approach does not include a 90day requirement. See the discussion in
part I.B.4.b(1)(e) of this Summary of
Comments and Explanation of Revisions
section.
(c) Assets to Which the Proposed
Consolidated Acquisition Rules Apply
Under the 2019 Proposed Regulations,
the Proposed Consolidated Acquisition
Rules apply to actual or deemed
acquisitions of ‘‘depreciable property,’’
regardless of whether such property is
of a type that is eligible for the
additional first year depreciation
deduction (eligible property) or of a type
that is ineligible for the additional first
year depreciation deduction (ineligible

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property). For example, under a literal
reading of the Proposed Consolidated
Asset Acquisition Rule, a member’s
acquisition of several parcels of
depreciable real estate that is not
eligible property from another member
would be subject to this rule (assuming
that all other requirements for
application of this rule are satisfied),
even though none of the transferred
property is eligible property. Similarly,
a member’s acquisition of the stock of a
target corporation whose assets largely
consist of depreciable real estate that is
not eligible property would be subject to
the Proposed Consolidated Deemed
Acquisition Rule (again, assuming that
all other requirements for application of
this rule are satisfied), even though most
of the target corporation’s assets are not
eligible property.
One commenter recommended that
the final regulations limit the
application of the Proposed
Consolidated Acquisition Rules to
actual or deemed acquisitions of eligible
property. The commenter explained that
application of the Proposed
Consolidated Acquisition Rules to
ineligible property would not further
the purposes of section 168(k) and
might lack statutory authority. The
commenter also asserted that such an
application might create a trap for
unwary taxpayers who do not consult
the regulations under section 168(k)
when planning transfers of ineligible
property.
The Treasury Department and the IRS
agree that the Proposed Consolidated
Acquisition Rules should apply only to
eligible property. Thus, the Delayed
Bonus Approach applies solely to
depreciable property, as defined in
§ 1.168(b)–1(a)(1), that meets the
requirements in § 1.168(k)–2(b)(2),
determined without regard to
§ 1.168(k)–2(b)(2)(ii)(C) (election not to
claim the additional first year
depreciation for a class of property)
except on the day after the
Deconsolidation Date. See the
discussion in part I.B.4.b(1)(e) of this
Summary of Comments and Explanation
of Revisions section.
(d) Application of the Proposed
Consolidated Deemed Acquisition Rule
to Qualified Stock Dispositions
Described in Section 355(d)(2) or (e)(2)
The Proposed Consolidated Deemed
Acquisition Rule does not apply to
QSDs described in section 355(d)(2) or
(e)(2). As explained in part 2(D)(iv) of
the Explanation of Provisions section in
the 2019 Proposed Regulations and part
II(C)(2)(c) of the Summary of Comments
and Explanation of Revisions section in
the 2019 Final Regulations, the Treasury

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Department and the IRS determined that
this limitation would be appropriate
because the rules applicable to such
QSDs do not treat a new target
corporation as acquiring assets from an
unrelated person. See § 1.336–2(b)(2).
One commenter argued that, although
the sale-to-self model in § 1.336–2(b)(2)
could be construed as violating the ‘‘no
prior use’’ requirement in section
168(k)(2)(E)(ii)(I) and § 1.168(k)–
2(b)(3)(iii)(A)(1), this model should not
control eligibility for the additional first
year depreciation deduction, for several
reasons. First, the commenter argued
that there is no policy rationale under
section 168(k) for treating QSDs
described in section 355(d)(2) or (e)(2)
differently than other transactions for
which an election under section 336(e)
is made. Second, the commenter argued
that the sale-to-self model was not
intended to be applied, and has not
been applied, for all Federal income tax
purposes. See, for example, § 1.336–
2(b)(2)(ii)(C) (for purposes of section
197(f)(9), section 1091, and any other
provision designated in the Internal
Revenue Bulletin by the Internal
Revenue Service, old target in its
capacity as the deemed seller of assets
is treated as separate and distinct from,
and unrelated to, old target in its
capacity as the deemed acquirer of
assets). Third, the commenter suggested
that taxpayers will structure around the
exclusion for these QSDs in order to
avail themselves of the Proposed
Consolidated Deemed Acquisition Rule.
Thus, the commenter recommended
expanding this rule to include all types
of QSD for which an election under
section 336(e) is made.
The Treasury Department and the IRS
do not agree with the commenter’s
recommendation to expand the scope of
the Proposed Consolidated Deemed
Acquisition Rule to include all types of
QSD for which an election under
section 336(e) is made. In general, a
section 336(e) election should not affect
the tax consequences to which the
purchaser or the distributee would have
been subject with respect to the
acquisition of target stock if a section
336(e) election had not been made. See
§ 1.336–2(c). As explained in the
preamble to the final section 336(e)
regulations, the Treasury Department
and the IRS believe that ‘‘the
predominant feature of the section
336(e) election with respect to a section
355(d)(2) or (e)(2) transaction is the
section 355 transaction.’’ 78 FR 28347,
28469 (May 15, 2013). Following such a
transaction, the controlled corporation
(that is, old target) generally remains in
existence, and it retains its earnings and
profits and other tax attributes. Because

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71741

old target remains in existence under
this construct, such attributes would
include old target’s prior use of its
depreciable property. Accordingly, the
Treasury Department and the IRS
decline to expand the scope of the
Proposed Consolidated Deemed
Acquisition Rule.
(e) Alternative Approaches
Commenters recommended several
alternative approaches to alleviate the
uncertainties and implementation issues
raised by the Proposed Consolidated
Acquisition Rules. This part I.B.4.b(1)(e)
of this Summary of Comments and
Explanation of Revisions section
discusses each alternative approach.
(i) Delayed Bonus Approach
The first alternative approach
recommended by commenters (Delayed
Bonus Approach) would treat the asset
acquisition as occurring on the date
such acquisition actually occurred for
all Federal income tax purposes and,
thus, as generally being subject to all
Federal income tax rules that ordinarily
would apply (with the exception of the
series of related transactions rules in
§ 1.168(k)–2(b)(3)(iii)(C)). For example,
during the interim period, the transferee
member would recognize depreciation
on all depreciable transferred assets
(including the eligible property), and
the transferor member would recognize
gain or loss in accordance with section
168(i)(7) and § 1.1502–13(c)(2).
Absent additional rules, the transferee
member would not be able to claim the
additional first year depreciation
deduction (see sections 179(d)(2)(A) and
(B) and the Group Prior Use Rule). To
enable the transferee member to claim
this deduction, the Delayed Bonus
Approach treats the transferee member
as (1) selling the eligible property to an
unrelated third party one day after the
Deconsolidation Date for an amount
equal to the member’s basis in the
eligible property at such time, and then
(2) acquiring identical, but different,
eligible property from another unrelated
third party for the same amount
(deemed sale and purchase of eligible
property). For this purpose, the
transferee member’s basis in the eligible
property on the day after the
Deconsolidation Date is the value of the
consideration paid by the transferee
member for the property less any
depreciation deductions taken by the
member with respect to such property
during the interim period.
The Treasury Department and the IRS
have determined that the Delayed Bonus
Approach would achieve the objectives
of the Proposed Consolidated
Acquisition Rules (that is, permitting

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additional first year depreciation to the
transferee member after the member
leaves the selling group pursuant to a
series of related transactions) while
creating fewer collateral consequences.
Moreover, because the Delayed Bonus
Approach would respect the asset
acquisition as occurring on the actual
acquisition date for all Federal income
tax purposes, this approach would
provide taxpayers with greater certainty
regarding the tax consequences of the
acquisition and the treatment of tax
items arising during the interim period.
Thus, these final regulations adopt the
Delayed Bonus Approach for actual and
deemed acquisitions of eligible property
that satisfy certain requirements. As
noted in part I.B.4.b(1)(b) of this
Summary of Comments and Explanation
of Revisions section, the Delayed Bonus
Approach does not include a 90-day
requirement because this approach
would not raise the same issues as the
Proposed Consolidated Acquisition
Rules. Furthermore, as noted in part
I.B.4.b(1)(c) of this Summary of
Comments and Explanation of Revisions
section, the transferee member’s (or
target’s) deemed sale and purchase of
assets the day after the Deconsolidation
Date under the Delayed Bonus
Approach applies solely to eligible
property (rather than to all depreciable
assets).
Under the Delayed Bonus Approach
in these final regulations, the transferee
member (or target) is treated as selling
and then purchasing eligible property
for cash. Accordingly, the deemed sale
and purchase of eligible property cannot
be characterized as an exchange of
property that is eligible for
nonrecognition treatment under section
1031. Moreover, in the deemed sale and
purchase of eligible property, the
transferee member (or target) is treated
as acquiring used property (deemed
replacement property). Accordingly, the
original use of such property does not
commence with the transferee member
(or target). As a result, the deemed sale
and purchase of eligible property does
not allow the deemed replacement
property to be eligible for federal
income tax credits or deductions that
require new property. For example,
such property does not satisfy the
original use requirement in section
48(a)(3)(B)(ii) for the energy credit.
Because the cost of the deemed
replacement property (and,
consequently, the adjusted basis in such
property) is identical to the transferee
member’s (or target’s) adjusted basis in
the eligible property, a question has
arisen as to whether section 179(d)(3)
and § 1.168(k)–2(b)(3)(iii)(A)(3)
potentially could apply to prevent the

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transferee member (or target) from
claiming the additional first year
depreciation deduction for such
property. To avoid any potential
uncertainty in this regard, these final
regulations expressly provide that the
acquisition of the deemed replacement
property does not result in the basis in
such property being determined, in
whole or in part, by reference to the
basis of other property held at any time
by the transferee member or target.
The Treasury Department and the IRS
note that, under the Delayed Bonus
Approach in these final regulations, the
deemed sale and purchase of eligible
property are treated as occurring for all
Federal income tax purposes. Treating
the deemed sale and purchase of eligible
property as applicable solely for
purposes of sections 168 and 179 (and
not for all Federal income tax purposes)
could lead to complications and
inconsistencies. Under such an
approach, taxpayers would be required
to treat each piece of eligible property
as two separate assets: (1) An asset that
exists for purposes of sections 168 and
179; and (2) an asset that exists for all
other Federal income tax purposes.
Therefore, this approach could present
difficulties in determining, for instance,
(1) how any depreciation claimed with
respect to the asset that exists for
purposes of sections 168 and 179 affects
the taxpayer’s adjusted basis in the asset
that exists for all other Federal income
tax purposes, and (2) how to calculate
the gain or loss recognized on a future
disposition of the eligible property.
The Delayed Bonus Approach does
not apply to property unless such
property is eligible property as of the
time of its acquisition by the transferee
member, the Deconsolidation Date, and
the day after the Deconsolidation Date.
For this purpose, the status of acquired
property as ‘‘eligible property’’ is
generally determined without regard to
§ 1.168(k)–2(b)(2)(ii)(C) (property
subject to an election not to claim the
additional first year depreciation
deduction for a class of property). As a
result, a series of related transactions
may be subject to the Delayed Bonus
Approach even if the common parent of
the selling consolidated group makes an
election under section 168(k)(7) not to
claim the additional first year
depreciation deduction for a class of
property placed in service by the
transferee member for the short taxable
year ending on the Deconsolidation
Date. However, to avoid creating a trap
for the unwary, the definition of
‘‘eligible property’’ takes into account
any such election made for the taxable
year that includes the day after the
Deconsolidation Date. Accordingly, one

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component in the definition of eligible
property effectively provides that for
such taxable year, the transferee
member cannot have made an election
under section 168(k)(7) not to claim the
additional first year depreciation
deduction for the class of property to
which the acquired property belongs. By
extension, the Delayed Bonus Approach
does not apply to acquired property
belonging to a class of property with
respect to which the transferee makes an
election under section 168(k)(7), for
property placed in service in the taxable
year that includes the day after the
Deconsolidation Date.
Additionally, these final regulations
allow taxpayers to elect out of the
application of the Delayed Bonus
Approach with respect to all eligible
property that otherwise would be
subject to the Delayed Bonus Approach.
If a taxpayer makes this election for a
transaction, the taxpayer also is deemed
to have made such an election for all
other transactions in the same series of
related transactions that otherwise
would be subject to the Delayed Bonus
Approach and that involve the same (or
a related) transferee member or target.
To provide clarity and uniformity with
the other elections in § 1.168(k)–2, these
final regulations provide that the
election may be revoked only by filing
a request for a private letter ruling and
obtaining the Commissioner of Internal
Revenue’s written consent to revoke the
election.
A commenter requested confirmation
that the deemed sale and purchase of
eligible property under the Delayed
Bonus Approach would not prevent the
transferee member’s deconsolidation in
a stock distribution from qualifying
under section 355. In other words, if
such eligible property comprises the
transferee member’s entire trade or
business, the deemed sale and purchase
might be viewed as precluding the
distribution from satisfying the ‘‘active
trade or business’’ requirement in
section 355(b). See section 355(b)(2)(C)
(a corporation is treated as engaged in
the active conduct of a trade or business
only if, among other things, such trade
or business was not acquired in a
recognition transaction during the fiveyear period ending on the date of the
distribution). The Treasury Department
and the IRS are considering this issue
and request comments for purposes of
potential future guidance.
(ii) Other Alternative Approaches
The second alternative approach
recommended by commenters (Modified
Consolidated Acquisition Approach)
would be identical to the Proposed
Consolidated Acquisition Rules, except

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that the asset acquisition would not be
treated as occurring on the day after the
Deconsolidation Date for all Federal
income tax purposes. Instead, the asset
acquisition would be treated as
occurring on the day after the
Deconsolidation Date solely for
purposes of determining (1) whether the
requirements of section 168(k) are
satisfied and, if so, (2) the amount,
location, and timing of the transferee
member’s (or new target’s) additional
first year depreciation deduction with
respect to the depreciable property. For
all other Federal income tax purposes,
the asset acquisition would be treated as
occurring on the date such acquisition
actually occurred.
The third alternative approach
recommended by commenters (Frozen
Depreciation Approach) is the same as
the Delayed Bonus Approach, except
that the transferee member would not be
permitted to claim depreciation
deductions during the interim period for
the acquired assets (and the transferor
member would not be required to take
into account gain or loss from the asset
acquisition under § 1.1502–13(c)).
The Treasury Department and the IRS
have determined that, although the
Modified Consolidated Acquisition
Approach would address certain issues
and uncertainties created by the
Proposed Consolidated Acquisition
Rules, this approach would create other
issues and uncertainties by delaying the
asset acquisition date for purposes of
section 168(k) but not for other Federal
income tax purposes. For instance, if the
Modified Consolidated Acquisition
Approach were applied to a deemed
asset acquisition pursuant to a section
338(h)(10) election, the acquisition date
would be delayed until one day after the
Deconsolidation Date for purposes of
section 168(k), but old target would be
deemed to sell its assets and liquidate
pursuant to § 1.338(h)(10)–1(d)(4)(i) on
the actual acquisition date for all other
Federal income tax purposes. This
duality could complicate the calculation
and allocation of the ADSP and AGUB
among the target’s assets by creating two
separate acquisition dates, and thus two
different dates on which such
calculation and allocation must be
determined. Therefore, these final
regulations do not adopt the Modified
Consolidated Acquisition Approach.
Similarly, with respect to the Frozen
Depreciation Approach, the Treasury
Department and the IRS have
determined that holding the transferee
member’s depreciation deductions (and
the transferor member’s gain or loss on
the asset acquisition) in abeyance could
create some of the same issues as those
identified by commenters with regard to

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the Proposed Consolidated Acquisition
Rules. Such issues include the proper
manner for reporting transactions that
are part of a series of related
transactions spanning multiple taxable
years, and the appropriate way to
account for changes in the depreciable
property during the interim period.
Accordingly, if the Frozen Depreciation
Approach were to be adopted, the 90day requirement might be required to
limit the scope of such issues. Thus,
these final regulations also do not adopt
this approach.
(2) Application of the Five-Year Safe
Harbor
As discussed in part I.B.1.a of this
Summary of Comments and Explanation
of Revisions section, the Five-Year Safe
Harbor in § 1.168(k)–2(b)(3)(iii)(B)(1) of
these final regulations provides that, in
determining if the taxpayer or a
predecessor previously had a
depreciable interest in property, ‘‘only
the five calendar years immediately
prior to the current calendar year in
which the property is placed in service
by the taxpayer, and the portion of such
current calendar year before the placedin-service date of the property without
taking into account the applicable
convention, are taken into account.’’
Commenters requested confirmation
that the Five-Year Safe Harbor applies
for purposes of the Group Prior Use
Rule and the Stock and Asset
Acquisition Rule.
The Treasury Department and the IRS
did not intend to require a different (and
longer) ‘‘look back’’ period for
consolidated group members than for
other taxpayers. Accordingly, these final
regulations clarify the Group Prior Use
Rule to provide that a member of a
consolidated group is treated as having
a depreciable interest in property only
if the group had a depreciable interest
within the ‘‘lookback period.’’ This
period, which is defined in these final
regulations in accordance with the FiveYear Safe Harbor, includes both the five
calendar years immediately prior to the
current calendar year in which the
property is placed in service by the
member and the portion of such current
calendar year before the placed-inservice date of the property, without
taking into account the applicable
convention. Similarly, these final
regulations clarify that the Stock and
Asset Acquisition Rule applies only if
the corporation that joins the
consolidated group had a depreciable
interest in the property within the
lookback period. These final regulations
have modified Examples 26, 27, and 30
in § 1.168(k)–2(b)(3)(vii) of the 2019
Proposed Regulations (Examples 1, 2,

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and 3 in § 1.1502–68(d) of these final
regulations) accordingly.
(3) Request for Additional Examples
One commenter requested several
additional examples to clarify the
application of the aforementioned
special rules for consolidated groups.
One such example would illustrate that
the Group Prior Use Rule does not apply
to situations in which an asset is
acquired by a former group member
(other than the member that directly
held the asset) following the termination
of the group. Another such example
would address the consequences of an
asset acquisition by one member of a
consolidated group if, in an unrelated
transaction, a corporation that
previously had a depreciable interest in
the property becomes a member of the
same consolidated group.
The Treasury Department and the IRS
agree that such examples would be
helpful and have included them in these
final regulations.
(4) Movement of Consolidated Rules to
Regulations Under Section 1502
The Treasury Department and the IRS
have determined that moving the
section 168(k) rules for consolidated
groups to the regulations under section
1502 would facilitate the identification
and application of these rules by
practitioners. Thus, these rules have
been moved from § 1.168(k)–2(b)(3)(v) of
the 2019 Proposed Regulations to new
§ 1.1502–68.
C. Acquisition of Property
1. Acquisition of a Trade or Business or
an Entity
Section 1.168(k)–2(b)(5)(iii)(G) of the
2019 Proposed Regulations provides
that a contract to acquire all or
substantially all of the assets of a trade
or business or to acquire an entity is
binding if it is enforceable under State
law against the parties to the contract
and that certain conditions do not
prevent the contract from being a
binding contract. This proposed rule
also provides that it applies to a contract
for the sale of stock of a corporation that
is treated as an asset sale as a result of
an election under section 338.
The Treasury Department and the IRS
are aware of potential questions
regarding whether § 1.168(k)–
2(b)(5)(iii)(G) of the 2019 Proposed
Regulations also applies to a contract for
the sale of stock of a corporation that is
treated as an asset sale as a result of an
election under section 336(e). The
Federal income tax consequences of a
section 336(e) election made with
respect to a qualified stock disposition

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not described, in whole or in part, in
section 355(d)(2) or (e)(2) are similar to
the Federal income tax consequences of
a section 338 election. See §§ 1.336–
1(a)(1) and 1.336–2(b)(1). Accordingly,
these final regulations clarify that
§ 1.168(k)–2(b)(5)(iii)(G) applies to a
contract for the sale of stock of a
corporation that is treated as an asset
sale as a result of an election under
section 336(e) made for a disposition
described in § 1.336–2(b)(1).
2. Property Not Acquired Pursuant to a
Written Binding Contract
Section 1.168(k)–2(b)(5)(v) of the 2019
Proposed Regulations provides that, in
general, the acquisition date of property
that the taxpayer acquires pursuant to a
contract that does not meet the
definition of a written binding contract
in § 1.168(k)–2(b)(5)(iii) of the 2019
Final Regulations is the date on which
the taxpayer paid or incurred more than
10 percent of the total cost of the
property, excluding the cost of any land
and preliminary activities. A commenter
on the 2019 Proposed Regulations
requested the bifurcation of a particular
type of contract that the taxpayer has
determined does not meet the definition
of a written binding contract in
§ 1.168(k)–2(b)(5)(iii) of the 2019 Final
Regulations. The contract at issue is
cancelable at any time by the taxpayer/
customer without penalty and requires
the taxpayer to reimburse the contractor
only for the costs the contractor has
incurred, plus the contractor’s profit
margin, prior to the date the contractor
receives a notice of cancellation by the
taxpayer. For such a contract, the
commenter requested that the final
regulations allow the contract to be
bifurcated into a binding contract for the
period prior to the effective date of
section 13201 of the TCJA and a
separate non-binding contract for the
period after the effective date of section
13201 of the TCJA. If the final
regulations allow such a bifurcation, the
commenter asserted that, if more than
10 percent of the costs of the project are
paid or incurred by the taxpayer before
the effective date of section 13201 of the
TCJA, none of such costs are eligible for
the 100-percent additional first year
depreciation deduction, but all costs
paid or incurred by the taxpayer after
the effective date of section 13201 of the
TCJA would meet the acquisition date
requirements for the 100-percent
additional first year depreciation
deduction.
The Treasury Department and the IRS
have determined that the change made
in these final regulations to the
component election (see part I.C.3 of
this Summary of Comments and

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Explanation of Revisions section)
generally addresses this comment.
Therefore, the Treasury Department and
the IRS decline to provide a special rule
for this particular type of contract.
3. Component Election
Section 1.168(k)–2(c) of the 2019
Proposed Regulations allows a taxpayer
to elect to treat one or more components
acquired or self-constructed after
September 27, 2017, of certain larger
self-constructed property as being
eligible for the additional first year
depreciation deduction (Component
Election). The larger self-constructed
property must be qualified property
under section 168(k)(2), as in effect
before the enactment of the TCJA, for
which the manufacture, construction, or
production began before September 28,
2017. However, the election is not
available for components of larger selfconstructed property when such
components are not otherwise eligible
for the additional first year depreciation
deduction.
a. Eligible Larger Self-Constructed
Property
Pursuant to § 1.168(k)–2(c)(2)(ii) of
the 2019 Proposed Regulations, larger
self-constructed property that is placed
in service by the taxpayer after
December 31, 2019, or larger selfconstructed property described in
section 168(k)(2)(B) or (C), as in effect
on the day before enactment of the
TCJA, that is placed in service after
December 31, 2020, is not eligible larger
self-constructed property. Accordingly,
any components of such property that
are acquired or self-constructed after
September 27, 2017, do not qualify for
the Component Election. A commenter
on the 2019 Proposed Regulations
requested that the final regulations
remove this cut-off date for when the
larger self-constructed property must be
placed in service because it does not
reflect the intent of section 13201 of the
TCJA of promoting capital investment,
modernization, and growth. If a
taxpayer constructs a building, the
Treasury Department and the IRS are
aware that taxpayers have questioned
whether the larger self-constructed
property is the building or the tangible
personal property constructed as part of
the building.
After considering these comments and
the comment for property not acquired
pursuant to a written binding contract
(see part I.C.2 of this Summary of
Comments and Explanation of Revisions
section), the Treasury Department and
the IRS have determined to expand the
larger self-constructed property that is
eligible for the Component Election.

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These final regulations provide that
eligible larger self-constructed property
also includes property that is
manufactured, constructed, or produced
for the taxpayer by another person
under a written contract that does not
meet the definition of a binding contract
under § 1.168(k)–2(b)(5)(iii) of the 2019
Final Regulations (written non-binding
contract) and 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. Further,
these final regulations remove the
requirement that the larger selfconstructed property be qualified
property under section 168(k)(2), as in
effect on the day before the enactment
of the TCJA, and instead provide that
the larger self-constructed property
must be (i) MACRS property with a
recovery period of 20 years or less,
computer software, water utility
property, or qualified improvement
property under section 168(k)(3) as in
effect on the day before the enactment
date of the TCJA, and (ii) qualified
property under § 1.168(k)–2(b) of the
2019 Final Regulations and these final
regulations, determined without regard
to the acquisition date requirement in
§ 1.168(k)–2(b)(5), for which the
taxpayer begins the manufacture,
construction, or production before
September 28, 2017. As a result of this
change, the cut-off dates for when the
larger self-constructed property must be
placed in service by the taxpayer now
align with the placed-in-service dates
under section 168(k)(6) and § 1.168(k)–
2(b)(4)(i). Because the Component
Election is an exception to the
acquisition date requirements in
§ 1.168(k)–2(b)(5)(iv) of the 2019 Final
Regulations and § 1.168(k)–2(b)(5)(v) of
these final regulations, and such rules
do not apply to qualified film,
television, and live theatrical
productions, the Treasury Department
and the IRS have determined to retain
the rule in § 1.168(k)–2(c) of the 2019
Proposed Regulations to exclude these
productions from being eligible for the
Component Election.
With regard to the taxpayers’ question
of whether the larger self-constructed
property is the building constructed by
the taxpayer or the tangible personal
property constructed as part of the
building, all tangible personal property
constructed as part of that building
generally is MACRS property with a
recovery period of 20 years or less. As
a result, the Treasury Department and
the IRS have determined that such
tangible personal property is the larger
self-constructed property for purposes

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of the Component Election if the
construction of all tangible personal
property of the building began before
September 28, 2017, and any eligible
component of such tangible personal
property is eligible for the Component
Election. Accordingly, these final
regulations clarify that all property that
is constructed as part of residential
rental property, nonresidential real
property, or an improvement to such
property, and that is MACRS property
with a recovery period of 20 years or
less, computer software, water utility
property, or qualified improvement
property under section 168(k)(3) as in
effect on the day before the enactment
date of the TCJA, is the larger selfconstructed property for purposes of the
Component Election.

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b. Eligible Components
To be eligible for the Component
Election, § 1.168(k)–2(c)(3) of the 2019
Proposed Regulations provides that a
component of the larger self-constructed
property must be qualified property
under § 1.168(k)–2(b) of the 2019 Final
Regulations and these final regulations
that is acquired or self-constructed by
the taxpayer after September 27, 2017.
These final regulations retain this rule.
In addition, these final regulations
clarify that the acquisition date of a
component acquired pursuant to a
written binding contract is determined
under § 1.168(k)–2(b)(5)(ii)(B) of the
2019 Final Regulations. If a component
is acquired or self-constructed pursuant
to a written non-binding contract, these
final regulations provide that the rules
under § 1.168(k)–2(b)(5)(v) of these final
regulations determine the acquisition
date of such component or when
manufacture, construction, or
production of such component begins.
These final regulations also include a
conforming change to § 1.168(k)–
2(b)(5)(v) clarifying that these rules
apply to property that is selfconstructed pursuant to a written nonbinding contract, and amend § 1.168(k)–
2(d)(3) to provide a rule similar to the
rule in § 1.168(k)–2(b)(5)(v) for property
that is described in section 168(k)(2)(B)
or (C) and is not acquired pursuant to
a written binding contract.
D. Property Described in Section
168(k)(2)(B)
Section 1.168(k)–2(e)(1)(iii) of the
2019 Proposed Regulations provides
that rules similar to the rules in section
4.02(1)(b) of Notice 2007–36 (2007–17
I.R.B. 1000) apply for determining the
amounts of unadjusted depreciable basis
attributable to the manufacture,
construction, or production of property
described in section 168(k)(2)(B) before

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January 1, 2027. These final regulations
clarify that such rules apply regardless
of whether the manufacture,
construction, or production of such
property is pursuant to a written
binding contract or a written nonbinding contract.
II. Definitions
A. Depreciable Property
Section 1.168(b)–1(a)(1) defines the
term ‘‘depreciable property’’ for
purposes of section 168. See also
§ 1.168(k)–2(b)(1). In connection with its
comments on the special rules for
consolidated groups in § 1.168(k)–
2(b)(3)(v) of the 2019 Proposed
Regulations, a commenter requested the
final regulations provide either an
explicit definition of that term or an
alternate term that is expressly limited
to property the nature of which is
eligible for the additional first year
depreciation deduction.
The definition of ‘‘depreciable
property’’ in § 1.168(b)–1(a)(1) is the
same definition of that term in
§ 1.168(k)–1(a)(2)(i) for purposes of
section 168(k) as in effect before the
enactment of the TCJA. The Treasury
Department and the IRS are not aware
of problems with applying the
definition under either § 1.168(b)–
1(a)(1) or § 1.168(k)–1(a)(2)(i). Moreover,
the Treasury Department and the IRS
have determined that such definition
clearly describes which property is
depreciable property. Accordingly, the
Treasury Department and the IRS
decline to adopt this comment.
However, the rules in § 1.1502–68 for
consolidated groups use the term
‘‘eligible property’’ to identify the types
of depreciable property eligible for the
additional first year depreciation
deduction.
B. Qualified Improvement Property
Section 1.168(b)–1(a)(5) of the 2019
Final Regulations defines the term
‘‘qualified improvement property’’ for
purposes of section 168. Section
168(e)(6), as amended by section 13204
of the TCJA, and § 1.168(b)–1(a)(5)(i)(A)
and (a)(5)(ii) provide the definition of
that term for improvements placed in
service after December 31, 2017. Section
2307 of the CARES Act amended section
168(e)(3)(E), (e)(6), and (g)(3)(B). Section
2307(a)(1)(A) of the CARES Act added a
new clause (vii) to the end of section
168(e)(3)(E) to provide that qualified
improvement property is classified as
15-year property. Section 2307(a)(1)(B)
of the CARES Act amended the
definition of qualified improvement
property in section 168(e)(6) by
providing that the improvement must be

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‘‘made by the taxpayer.’’ In addition,
section 2307(a)(2) of the CARES Act
amended the table in section
168(g)(3)(B) to provide a recovery period
of 20 years for qualified improvement
property for purposes of the alternative
depreciation system under section
168(g). These amendments to section
168(e) and (g) are effective as if included
in section 13204 of the TCJA and,
therefore, apply to property placed in
service after December 31, 2017.
As a result of these changes by section
2307 of the CARES Act, these final
regulations amend § 1.168(b)–
1(a)(5)(i)(A) to provide that the
improvement must be made by the
taxpayer. The Treasury Department and
the IRS are aware of questions regarding
the meaning of ‘‘made by the taxpayer’’
with respect to third-party construction
of the improvement and the acquisition
of a building in a transaction described
in section 168(i)(7)(B) (pertaining to
treatment of transferees in certain
nonrecognition transactions) that
includes an improvement previously
made by, and placed in service by, the
transferor or distributor of the building.
In this regard, the Treasury Department
and the IRS believe that an
improvement is made by the taxpayer if
the taxpayer makes, manufactures,
constructs, or produces the
improvement for itself or if the
improvement is made, manufactured,
constructed, or produced for the
taxpayer by another person under a
written contract. In contrast, if a
taxpayer acquires nonresidential real
property in a taxable transaction and
such nonresidential real property
includes an improvement previously
placed in service by the seller of such
nonresidential real property, the
improvement is not made by the
taxpayer.
Consistent with section 168(i)(7)
(pertaining to treatment of transferees in
certain nonrecognition transactions), the
Treasury Department and the IRS also
believe that if a transferee taxpayer
acquires nonresidential real property in
a transaction described in section
168(i)(7)(B) (for example, section 351 or
721), any improvement that was
previously made by, and placed in
service by, the transferor or distributor
of such nonresidential real property and
that is qualified improvement property
in the hands of the transferor or
distributor is treated as being made by
the transferee taxpayer, and thus is
qualified improvement property in the
hands of the transferee taxpayer, but
only for the portion of its basis in such
property that does not exceed the
transferor’s or distributor’s adjusted
depreciable basis of this property.

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However, because the basis is
determined by reference to the
transferor’s or distributor’s adjusted
basis in the improvement, the transferee
taxpayer’s acquisition does not satisfy
section 179(d)(2)(C) and § 1.179–
4(c)(1)(iv) and thus, does not satisfy the
used property acquisition requirements
of § 1.168(k)–2(b)(3)(iii). Accordingly,
the qualified improvement property is
not eligible for the additional first year
depreciation deduction in the hands of
the transferee taxpayer, except as
provided in § 1.168(k)–2(g)(1)(iii).
An example has been added to
§ 1.168(k)–2(b)(2)(iii) to illustrate the
eligibility of qualified improvement
property for the additional first year
depreciation deduction.

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C. Predecessor and Class of Property
Section 1.168(k)–2(a)(2)(iv)(B) of the
2019 Final Regulations defines a
predecessor as including a transferor of
an asset to a transferee in a transaction
in which the transferee’s basis in the
asset is determined, in whole or in part,
by reference to the basis of the asset in
the hands of the transferor. A
commenter requested clarification of
whether this definition was intended to
apply only with respect to the specific
property transferred or more broadly.
The Treasury Department and the IRS
intended the definition of a
‘‘predecessor’’ in § 1.168(k)–
2(a)(2)(iv)(B) of the 2019 Final
Regulations to be property-specific.
Similarly, the Treasury Department and
the IRS intended the definition of a
‘‘class of property’’ in § 1.168(k)–
2(f)(1)(ii)(G) of the 2019 Final
Regulations (regarding basis
adjustments in partnership assets under
section 743(b)) to be partner-specific.
Accordingly, these final regulations
amend § 1.168(k)–2(a)(2)(iv)(B) of the
2019 Final Regulations to substitute
‘‘the’’ for ‘‘an’’, and these final
regulations amend § 1.168(k)–
2(f)(1)(ii)(G) of the 2019 Final
Regulations to substitute ‘‘Each’’ for
‘‘A’’.
Pursuant to § 1.168(k)–2(a)(2)(iv)(E) of
the 2019 Final Regulations, a transferor
of an asset to a trust is a predecessor
with respect to the trust. The Treasury
Department and the IRS intended that
this provision apply only to transfers
involving carryover basis. Because
§ 1.168(k)–2(a)(2)(iv)(B) of the 2019
Final Regulations applies to such
transfers, these final regulations remove
§ 1.168(k)–2(a)(2)(iv)(E) of the 2019
Final Regulations.

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Statement of Availability of IRS
Documents
The IRS Revenue Procedures and
Revenue Rulings cited in this document
are published in the Internal Revenue
Bulletin (or Cumulative Bulletin) and
are available from the Superintendent of
Documents, U.S. Government
Publishing Office, Washington, DC
20402, or by visiting the IRS website at
http://www.irs.gov.
Applicability Date
The definition of qualified
improvement property in § 1.168(b)–
1(a)(5)(i)(A) of these final regulations
applies to depreciable property placed
in service by the taxpayer after
December 31, 2017. Sections 1.168(k)–2
and 1.1502–68 of these final regulations
apply to depreciable property, including
certain components, acquired after
September 27, 2017, and placed in
service, or certain plants planted or
grafted, as applicable, by the taxpayer
during or after the taxpayer’s taxable
year that begins on or after January 1,
2021. However, a taxpayer may choose
to apply §§ 1.168(k)–2 and 1.1502–68 of
these final regulations to depreciable
property, including certain components,
acquired and placed in service after
September 27, 2017, or certain plants
planted or grafted after September 27,
2017, as applicable, by the taxpayer
during a taxable year ending on or after
September 28, 2017, provided the
taxpayer applies all rules in §§ 1.168(k)–
2 and 1.1502–68 (to the extent relevant)
in their entirety and in a consistent
manner. See section 7805(b)(7).
In the case of property described in
§ 1.1502–68(e)(2)(i) of these final
regulations that is acquired in a
transaction that satisfies the
requirements of § 1.1502–68(c)(1)(ii) or
(c)(2)(ii) of these final regulations, the
taxpayer may apply §§ 1.168(k)–2 and
1.1502–68 of these final regulations for
such property only if the rules are
applied, in their entirety and in a
consistent manner, by all parties to the
transaction, including the transferor
member, the transferee member, and the
target, as applicable, and the
consolidated groups of which they are
members, for the taxable year(s) in
which the transaction occurs and the
taxable year(s) that includes the day
after the deconsolidation date, as
defined in § 1.1502–68(a)(2)(iii) of these
final regulations.
Additionally, once a taxpayer applies
§§ 1.168(k)–2 and 1.1502–68 of these
final regulations, in their entirety, for a
taxable year, the taxpayer must continue
to apply §§ 1.168(k)–2 and 1.1502–68 of
these final regulations, in their entirety,

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for the taxpayer’s subsequent taxable
years.
Alternatively, a taxpayer may rely on
the proposed regulations under section
168(k) in regulation project REG–
106808–19 (84 FR 50152; 2019–41 I.R.B.
912), with respect to depreciable
property, including certain components,
acquired and placed in service after
September 27, 2017, or certain plants
planted or grafted after September 27,
2017, as applicable, by the taxpayer
during a taxable year ending on or after
September 28, 2017, and before the
taxpayer’s first taxable year that begins
on or after January 1, 2021, if (1) the
taxpayer follows the proposed
regulations in their entirety, except for
the Partnership Lookthrough Rule in
proposed § 1.168(k)–2(b)(3)(iii)(B)(5),
and in a consistent manner, and (2) all
members of a consolidated group
consistently rely on the same set of
rules. Further, if such property is
acquired in a transaction described in
proposed § 1.168(k)–2(b)(3)(v)(C) or (D),
the taxpayer may rely on the proposed
regulations under section 168(k) for
such property only if the rules are
followed, in their entirety and in a
consistent manner, by all parties to the
transaction, including the transferor
member, the transferee member, and the
target, as applicable, and the
consolidated groups of which they are
members, for the taxable year(s) in
which the transaction occurs and the
taxable year(s) that includes the day
after the Deconsolidation Date. For this
purpose, the terms transferor member,
transferee member, and target have the
meaning provided in proposed
§ 1.168(k)–2(b)(3)(v)(C) and (D), and the
term Deconsolidation Date has the
meaning provided in proposed
§ 1.168(k)–2(b)(3)(v)(C)(1).
Special Analyses
I. Regulatory Planning and Review—
Economic Analysis
Executive Orders 12866, 13563, and
13771 direct agencies to assess costs and
benefits of available regulatory
alternatives and, if regulation is
necessary, to select regulatory
approaches that maximize net benefits
(including (i) potential economic,
environmental, and public health and
safety effects, (ii) potential distributive
impacts, and (iii) equity). Executive
Order 13563 emphasizes the importance
of quantifying both costs and benefits,
reducing costs, harmonizing rules, and
promoting flexibility.
These final regulations have been
designated as subject to review under
Executive Order 12866 pursuant to the
Memorandum of Agreement (April 11,

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Federal Register / Vol. 85, No. 218 / Tuesday, November 10, 2020 / Rules and Regulations
2018) (MOA) between the Treasury
Department and the Office of
Management and Budget (OMB)
regarding review of tax regulations. The
Office of Information and Regulatory
Affairs has designated these regulations
as economically significant under
section 1(c) of the MOA. Accordingly,
the OMB has reviewed these
regulations.

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A. Background
i. Bonus Depreciation
In general, section 168(k) allows
taxpayers to immediately deduct some
portion of investment in certain types of
capital assets referred to as the ‘‘bonus
percentage.’’ This provision is
colloquially referred to as ‘‘bonus
depreciation.’’ Public Law 115–97,
commonly referred to as the Tax Cuts
and Jobs Act (TCJA), increased the
bonus percentage from 50 percent to 100
percent for qualified property acquired
after September 27, 2017, which
accelerates depreciation deductions
relative to previous law. The TCJA also
removed the ‘‘original use’’ requirement,
meaning that taxpayers could claim
bonus depreciation on certain ‘‘used’’
property. The TCJA made several other
modest changes to the operation of
section 168(k). First, it excluded from
the definition of qualified property any
property used by rate-regulated utilities
and certain firms (primarily automobile
dealerships) with ‘‘floor plan financing
indebtedness’’ as defined under section
163(j). Furthermore, section
168(k)(2)(a)(ii)(IV) and (V) allowed
qualified film, television, and live
theatrical productions (as defined under
Section 181) to qualify for bonus
depreciation.
The Treasury Department and the IRS
promulgated regulations under
§ 1.168(k)–2 to generally provide
structure and clarity for the
implementation of section 168(k). Such
regulations were proposed as REG–
104397–18 (2018 Proposed Regulations)
and finalized as TD 9874 (2019 Final
Regulations). However, the Treasury
Department and the IRS determined that
there remained several outstanding
issues requiring clarification that should
be subject to notice and comment. In
response, the Treasury Department and
the IRS issued an additional notice of
proposed rulemaking as REG 106808–19
(2019 Proposed Regulations). These
final regulations finalize the 2019
Proposed Regulations with only minor
changes.
These final regulations (these
regulations) address ambiguities related
to the operation of section 168(k)(9),
which describes property that is

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ineligible for bonus depreciation.
Second, these regulations create a de
minimis rule which provides that a
taxpayer will be deemed not to have had
a prior depreciable interest in a
property—and thus that property will be
eligible for bonus depreciation in that
taxpayer’s hands (assuming it otherwise
qualifies)—if the taxpayer previously
disposed of that property within 90 days
of the date on which that property was
originally placed in service. Third, these
regulations provide for the treatment of
an asset acquisition as part of a sale of
a member of a consolidated group from
one group to another. Fourth, these
regulations clarify the treatment of a
series of related transactions. Finally,
these regulations provide an election to
treat certain components of larger selfconstructed property as eligible for the
increased bonus percentage even if the
construction of such larger selfconstructed property began before
September 28, 2017.
B. Economic Analysis
1. No-Action Baseline
In this analysis, the Treasury
Department and the IRS assess the
benefits and costs of these regulations
relative to a no-action baseline reflecting
anticipated Federal income tax-related
behavior in the absence of these
regulations.
2. Summary of Economic Effects
These regulations provide certainty
and consistency in the application of
section 168(k) by providing definitions
and clarifications regarding the statute’s
terms and rules. In the absence of the
guidance provided in these regulations,
the chance that different taxpayers
might interpret the statute differently is
exacerbated. For example, two similarly
situated taxpayers might interpret the
statutory provisions pertaining to the
definition of property eligible for bonus
depreciation differently, with one
taxpayer pursuing a project that another
comparable taxpayer might decline
because of a different interpretation of
whether property is eligible for bonus
depreciation under 168(k). If this second
taxpayer’s activity is more profitable, an
economic loss arises. Similar situations
may arise under each of the provisions
addressed by these regulations.
Certainty and clarity over tax treatment
generally also reduce compliance costs
for taxpayers and increase overall
economic performance.
An economic loss might also arise if
all taxpayers have similar
interpretations under the baseline of the
tax treatment of particular deductible
items but those interpretations differ

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slightly from the interpretation Congress
intended for deductions of these items.
For example, these regulations may
specify a tax treatment that few or no
taxpayers would adopt in the absence of
specific guidance but that nonetheless
advances Congressional intent. In these
cases, guidance provides value by
bringing economic decisions closer in
line with the intent and purpose of the
statute.
While no guidance can curtail all
differential or inaccurate interpretations
of the statute, these regulations
significantly mitigate the chance for
differential or inaccurate interpretations
and thereby increase economic
efficiency.
Because these regulations clarify the
tax treatment of bonus depreciation for
certain taxpayers, there is the possibility
that business decisions may change as a
result of these regulations relative to the
no-action baseline. Averaged across
taxpayers in the economy, these
regulations will tend to expand the pool
of property that is eligible for bonus
depreciation, thus reducing effective tax
rates for affected taxpayers, relative to
the no-action baseline. This reduction in
effective tax rates, viewed in isolation,
is generally projected to increase
economic activity by these taxpayers
relative to the no-action baseline.
3. Economic Analysis of Specific
Provisions
i. Property Excluded From Bonus by
Section 168(k)(9)
Section 168(k)(9) provides that
property used by certain businesses is
not eligible for bonus depreciation.
These businesses include certain rateregulated utilities and certain firms
(primarily motor vehicle dealerships)
with floor plan financing indebtedness
and total interest expense that exceeds
certain thresholds.
These regulations clarify that those
taxpayers that lease property to such
businesses described by section
168(k)(9) may claim bonus depreciation,
so long as other requirements of section
168(k) are met. This approach broadly
follows existing normalization rules
(which pre-date TCJA and which
provide generally for the reconciliation
of tax income and book income for
regulatory purposes for utilities), which
provide that lessors to public utilities
are not bound by such rules so long as
they themselves are not a public utility.
The Treasury Department and the IRS
expect that this guidance will be easy
for taxpayers to interpret and comply
with. To the extent that lessors can
claim bonus depreciation, it is plausible
that the market-clearing lease price for

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such assets will fall, potentially
enabling some expansions of output and
contributing to economic growth.
These regulations next clarify which
businesses fall under the umbrella of
section 168(k)(9)(A) (utilities) and
section 168(k)(9)(B) (firms with floor
plan financing indebtedness). In regards
to section 168(k)(9)(A), which applies to
property that is ‘‘primarily used’’ in
certain utilities businesses, these
regulations provide that the ‘‘primary
use’’ of property is consistent with how
primary use is determined in existing
regulations under section 167. This
application should be familiar to
taxpayers, and thus relatively easy to
comply with.
The statutory language of section
168(k)(9)(B) is somewhat ambiguous,
requiring more substantive
clarifications. First, section 168(k)(9)(B)
provides that firms with floor plan
financing indebtedness are ineligible for
bonus depreciation ‘‘if the floor plan
financing interest [from such
indebtedness] was taken into account
under [section 163(j)(1)(C)].’’ These
regulations clarify that such interest is
in fact ‘‘taken into account’’ only if the
firm in fact received a benefit from
section 163(j)(1)(C)—i.e., if total
business interest expense (including
floor plan financing interest) exceeds
business interest income plus 30
percent (50 percent for taxable years
beginning during 2019 and 2020) of
adjusted taxable income. This decision
allows more firms to claim bonus
depreciation than if the Treasury
Department and the IRS had made the
opposite interpretation (deeming all
firms with floor plan financing interest
to be ineligible for bonus depreciation,
regardless of whether the firm received
a benefit from section 163(j)(1)(C)).
However, the Treasury Department and
the IRS expect that most taxpayers
would have interpreted the phrase
‘‘taken into account’’ in the same
manner as these regulations in the
absence of these regulations, implying
that the economic effects of this
provision are modest.
An additional ambiguity in section
168(k)(9)(B) pertains to the length of
time that the section applies to a given
firm. The section refers to a ‘‘trade or
business that has had floor plan
financing indebtedness . . . if the floor
plan financing interest related to such
indebtedness was taken into account
under [section 163(j)(1)(C)]’’ (emphasis
added). Consider a firm (Example A)
that received a benefit from section
163(j)(C)(1) in the 2021 tax year
(meaning that its interest deduction
would have been smaller if not for
section 163(j)(C)(1)) but not in the 2022

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tax year or any other later year. The
Treasury Department and the IRS
considered two options to address the
length of time to which this designation
would apply: (i) In perpetuity, such that
such businesses would be forever
ineligible for bonus depreciation; or (ii)
annually; that is, section 168(k)(9)(B) is
determined on an annual basis. Under
this option, the firm in Example A
would not be eligible for bonus
depreciation in 2021, but so long as the
other requirements were met, it would
be eligible for bonus depreciation in
2022.
These regulations adopt the second
option. This interpretation enables more
firms to be eligible for bonus
depreciation in more years, relative to
the alternative regulatory approach, and
would thus potentially increase
investment by such firms. The Treasury
Department and the IRS expect that a
substantial proportion of taxpayers
would have come to a different
conclusion regarding the interpretation
of this timing in the absence of these
regulations. Therefore, this provision
could be expected to affect economic
activity by these taxpayers relative to
the no-action baseline.
The Treasury Department and the IRS
engaged in an analysis of these effects
based on historical tax data, parameter
values from the economic literature for
the effect of bonus depreciation on
investment, and assumptions regarding
taxpayer interpretations in the absence
of these regulations. This analysis
projects that this provision will cause
investment to increase in this industry
by no greater than $55 million in any
year, and approximately $25 million per
year on average over the period from
2019–2028, relative to the no-action
baseline. Additionally, this analysis
projects that some share of this
increased investment will reduce
investment in other industries through
crowd-out effects.
ii. Prior Depreciable Interest
In general, to be statutorily eligible for
bonus depreciation, a given property
may not have been owned and
depreciated by the same firm in the
past. This requirement has the effect of
penalizing any tax-driven ‘‘churning’’ of
assets, whereby a firm could sell and
soon thereafter repurchase the same
asset in order to claim the 100 percent
deduction. The 2019 Final Regulations
defined ‘‘ownership’’ for this purpose as
having a prior depreciable interest.
These regulations create an exception
that provides that a taxpayer does not
have a prior depreciable interest in a
given property if the taxpayer disposed
of the property within 90 days of the

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initial date when the property was
placed in service (additional
requirements apply to the extent the
original acquisition occurred prior to
September 28, 2017). The Treasury
Department and the IRS instituted this
rule to address situations where
temporary ownership of property is
necessary to facilitate certain lease
arrangements so that the property
subsequently purchased off-lease is not
ineligible for bonus depreciation and to
coordinate with the syndication
transaction rules of section
168(k)(2)(E)(iii).
The Treasury Department and the IRS
do not anticipate substantial economic
effects of this provision. Nevertheless, it
will generally have the effect of causing
more property to be eligible for bonus
depreciation (increasing incentives to
invest) relative to the no-action baseline.
This provision is not expected to
meaningfully increase tax-driven or
economically wasteful churning of
assets relative to the no-action baseline.
iii. Group Prior Use Rule
These regulations clarify several
aspects of the ‘‘Group Prior Use Rule’’
as introduced in the 2018 Proposed
Regulations. Under that rule, all
members of a consolidated group are
treated as having had a depreciable
interest in a property if any member of
the consolidated group had such a
depreciable interest. First, these final
regulations clarify that the rule ceases to
be in effect once the consolidated group
terminates as a result of joining another
consolidated group. Second, these
regulations clarify that the Group Prior
Use Rule does not apply to a
corporation after it deconsolidates from
the consolidated group, so long as that
corporation did not in fact previously
own that property. As is the case with
the prior use rules generally, the
Treasury Department and the IRS do not
anticipate large economic effects as a
result of this section of these regulations
relative to the no-action baseline.
iv. Purchases of Assets as Part of
Acquisition of Entire Business
These regulations clarify the
procedure for certain purchases of assets
by a given corporation from a related
party that are a part of an integrated
plan involving the selling of that
corporation from one group to another.
Specifically, these regulations provide
that the deduction for bonus
depreciation is allowed in such
circumstances and should be claimed by
the acquiring group. These regulations
provide for a similar treatment in the
case of deemed acquisitions in the case
of an election under section 338(h)(10)

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or section 336(e). These rules cause the
tax treatment to reflect the economic
reality, in which the acquiring group is
bearing the economic outlay of the asset
purchase, and that acquiring group had
no economic prior depreciable interest.
By aligning the tax consequences with
the economic allocations, this treatment
minimizes potential distortions caused
by the anti-churning rules relative to the
no-action baseline.

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v. Component Rule Election
In 2010, Congress increased the bonus
percentage from 50 percent to 100
percent for property placed in service
between September 9, 2010 and
December 31, 2011. In 2011, the IRS
issued Revenue Procedure 2011–26 to
allow taxpayers to elect to have the 100
percent bonus rate apply to components
of larger self-constructed property
whose construction began before
September 9, 2010, so long as (1) the
components were acquired (or selfconstructed) after that date and (2) the
larger self-constructed property itself
otherwise qualifies for bonus
depreciation generally. These
regulations provide an analogous rule,
replacing September 9, 2010 with
September 28, 2017. This provision will
allow more property to qualify for 100
percent bonus depreciation relative to
the no-action baseline. Furthermore,
this provision provides neutrality
between taxpayers who acquire distinct,
smaller pieces of depreciable property
and those taxpayers that invest a similar
amount in fewer, larger pieces of
depreciable property whose
construction takes place over a longer
period of time. By treating similar
taxpayers (and similar choices)
similarly, this rule enhances economic
efficiency by minimizing tax-related
distortions. However, the Treasury
Department and the IRS project these
rules to have only a modest effect on
future economic decisions relative to
the no-action baseline. These rules
affect only taxpayers (1) that acquire (or
self-construct) components after
September 27, 2017 and (2) that began
construction of the larger selfconstructed property prior to September
28, 2017 (approximately 32 months
ago). The Treasury Department and the
IRS expect relatively few taxpayers to be
affected by this provision going forward.
vi. Series of Related Transactions
The 2018 Proposed Regulations
provided that, in a series of related
transactions, the relationship between
the transferor and transferee of an asset
was determined only after the final
transaction in the series (Series of
Related Transactions Rule). Commenters

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had expressed confusion regarding
whether this rule applies to testing
whether parties are related under
section 179(d)(2), or whether it applies
more broadly (e.g., in determining
whether the taxpayer had a prior
depreciable interest). These regulations
clarify that this Series of Related
Transactions Rule is intended only to
test the relatedness of the parties
involved in the series of related
transactions.
These regulations further revise the
Series of Related Transactions Rule to
address its application in various
situations. Under these regulations,
relatedness is tested after each step of
the series of related transactions and
between the original transferor in the
series and the direct transferor, with a
substantial exception that any
intermediary (i.e., a taxpayer other than
the original transferor or ultimate
transferee) is disregarded so long as that
intermediary (1) never places the
property in service or (2) disposes of the
property in the same taxable year in
which it was placed in service. Testing
relatedness after each step in the
transaction allows certain
intermediaries in the series to claim
bonus depreciation if they maintained
use of the property for a non-trivial
length of time. The Treasury
Department and the IRS do not predict
substantial economic effects of this
provision relative to the no-action
baseline.
vii. Miscellaneous
These regulations put forward rules to
the extent existing regulations apply in
slightly new contexts. In particular,
these regulations clarify when a binding
contract is in force to acquire all or
substantially all the assets of a trade or
business. Additionally, consistent with
the rules of § 1.168(d)–1(b)(4), these
regulations provide that, for the purpose
of determining whether the mid-quarter
convention applies, depreciable basis is
not reduced by the amount of bonus
depreciation.
The Treasury Department and the IRS
do not anticipate large economic effects
of these clarifications relative to the noaction baseline, though the additional
clarity provided by these regulations
will likely reduce compliance burdens.
4. Number of Affected Taxpayers
The most substantial components of
these regulations affect the ability of
dealers of motor vehicles to claim bonus
depreciation. Based on data from tax
year 2017, the Treasury Department and
the IRS estimate that there are
approximately 94,000 taxpayers in that
industry who may be affected by these

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71749

regulations based on the taxpayer’s
voluntarily reported NAICS code. Of
this 94,000, 14,000 are filers of Form
1120, 42,000 are filers of Form 1120S,
12,000 are filers of Form 1065, and
26,000 are filers of Form 1040.
Additionally, other components of these
regulations may have a very slight effect
on all taxpayers that claim bonus
depreciation. Including such taxpayers,
these regulations may affect
approximately 2.85 million taxpayers,
including 160,000 filers of Form 1120,
560,000 filers of Form 1120S, 400,000
filers of Form 1065, and 1.75 million
filers of Form 1040.
II. Paperwork Reduction Act
The collections of information in
these final regulations are in
§§ 1.168(k)–2(c) and 1.1502–68(c)(4).
The collection of information in
§ 1.168(k)–2(c) is an election that a
taxpayer may make to treat one or more
components acquired or selfconstructed after September 27, 2017, of
certain larger self-constructed property
as being eligible for the 100-percent
additional first year depreciation
deduction under section 168(k). The
larger self-constructed property must be
MACRS property with a recovery period
of 20 years or less, computer software,
water utility property, or qualified
improvement property placed in service
by the taxpayer after September 27,
2017, and before January 1, 2018, that is
qualified property under section
168(k)(2) for which the manufacture,
construction, or production began
before September 28, 2017. The election
is made by attaching a statement to a
Federal income tax return indicating
that the taxpayer is making the election
under § 1.168(k)–2(c) and whether the
taxpayer is making the election for all or
some of the components described in
§ 1.168(k)–2(c).
The collection of information in
§ 1.1502–68(c)(4) is an election that a
taxpayer may make to not claim the
additional first year depreciation
deduction for qualified property, and
which § 1.1502–68(c)(1) or (2) would
otherwise require the taxpayer to claim
such deduction when a member of a
consolidated group acquires from
another member property eligible for the
additional first year depreciation
deduction (or stock of a third member
holding such property), and the acquirer
member (and acquired member, if
applicable) then leaves the consolidated
group. To make the election, the
corporation must attach a statement to
its timely filed federal income tax return
(including extensions) for the taxable
year that begins after the date on which
it leaves the consolidated group. The

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statement must describe the
transaction(s) to which § 1.1502–68(c)(1)
or (2) would apply and state that the
corporation elects not to claim the
additional first year depreciation
deduction for any property transferred
in such transaction(s).
For purposes of the Paperwork
Reduction Act of 1995 (44 U.S.C.
3507(d)) (PRA), the reporting burden
associated with § 1.168(k)–2(c) will be
reflected in the PRA submission
associated with income tax returns in
the Form 1120 series, Form 1040 series,
Form 1041 series, and Form 1065 series
(for OMB control numbers, see chart at
the end of this part II of this Special
Analysis section). The estimate for the
number of impacted filers with respect

to the collection of information
described in this part is 0 to 41,775
respondents. Partial data was available
to directly estimate the upper bound for
the number of impacted filers. The
upper bound estimate is based on the
change in volume of federal income tax
return filers that amended a 2017 or
2018 filing a nonzero entry on Form
4562 Line 14 (additional first year
depreciation deduction).
For purposes of the PRA, the
reporting burden associated with
§ 1.1502–68(c)(4) will be reflected in the
PRA submission associated with income
tax returns in the Form 1120 series (for
OMB control number, see chart at the
end of this part II of this Special
Analysis section). The estimate for the

number of impacted filers with respect
to the collection of information
described in this part is 0 to 500
respondents. Partial data was available
to estimate the upper bound for the
number of impacted filers. The upper
bound estimate is based on the observed
volume of federal income tax return
filers that are a subsidiary corporation of
a parent, have a history of reporting
depreciation on a Form 4562, and based
on the parent’s consolidated federal tax
return filing in 2017 and 2018, the
subsidiary deconsolidated from the
consolidated group.
The IRS estimates the number of
affected filers to be the following:

TAX FORMS IMPACTED
Number of
respondents
(estimated)

Collection of information
Section 1.168(k)–2(c) Election for components of larger self-constructed property for which the manufacture, construction, or production begins before September 28, 2017.
Section 1.1502–68(c)(4) Election to not claim the additional first year
depreciation deduction under § 1.1502–68(c)(1) or (2) for property
owned by a subsidiary corporation of a consolidated group that is
qualified property after the subsidiary corporation leaves the consolidated group.

0–41,775
0–500

Forms to which the information may be attached
Form 1120 series, Form 1040 series, Form 1041 series, and Form 1065 series.
Form 1120 series.

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Source: IRS:RAAS:KDA (CDW 5–16–20 for § 1.168(k)–2(c) election and CDW 5–15–20 for § 1.1502–68(c)(4)(i) election).

The current status of the PRA
submissions related to the tax forms that
will be revised as a result of the
information collections in the section
168(k) regulations and the section 1502
regulations is provided in the
accompanying table. As described
earlier, the reporting burdens associated
with the information collections in the
regulations are included in the
aggregated burden estimates for OMB
control numbers 1545–0123 (which
represents a total estimated burden time
for all forms and schedules for
corporations of 3.344 billion hours and
total estimated monetized costs of
$61.558 billion ($2019)), 1545–0074
(which represents a total estimated
burden time, including all other related
forms and schedules for individuals, of
1.721 billion hours and total estimated
monetized costs of $33.267 billion
($2019)), and 1545–0092 (which
represents a total estimated burden
time, including all other related forms
and schedules for trusts and estates, of
307,844,800 hours and total estimated
monetized costs of $9.950 billion
($2016)). The IRS is currently in the
process of revising the methodology it
uses to estimate burden and costs for
OMB control number 1545–0092. It is

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expected that future estimates under
this OMB control number will include
dollar estimates of annual burden costs
to taxpayers calculated using this
revised methodology. The overall
burden estimates provided for the OMB
control numbers below are aggregate
amounts that relate to the entire package
of forms associated with the applicable
OMB control number and will in the
future include, but not isolate, the
estimated burden of the tax forms that
will be created or revised as a result of
the information collections in the
regulations. These numbers are
therefore unrelated to the future
calculations needed to assess the burden
imposed by the regulations. These
burdens have been reported for other
regulations that rely on the same OMB
control numbers to conduct information
collections under the PRA, and the
Treasury Department and the IRS urge
readers to recognize that these numbers
are duplicates and to guard against over
counting the burden that the regulations
that cite these OMB control numbers
imposed prior to the TCJA. No burden
estimates specific to the forms affected
by the regulations are currently
available. The Treasury Department and
the IRS have not estimated the burden,

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including that of any new information
collections, related to the requirements
under the regulations. For the OMB
control numbers discussed earlier, the
Treasury Department and the IRS
estimate PRA burdens on a taxpayertype basis rather than a provisionspecific basis. Those estimates would
capture changes made by the TCJA and
those that arise out of discretionary
authority exercised in these final
regulations and other regulations that
affect the compliance burden for those
forms.
The Treasury Department and the IRS
request comments on all aspects of
information collection burdens related
to these final regulations, including
estimates for how much time it would
take to comply with the paperwork
burdens described earlier for each
relevant form and ways for the IRS to
minimize the paperwork burden. In
addition, when available, drafts of IRS
forms are posted for comment at https://
apps.irs.gov/app/picklist/list/
draftTaxForms.htm. IRS forms are
available at https://www.irs.gov/formsinstructions. Forms will not be finalized
until after they have been approved by
OMB under the PRA.

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Form

Type of filer

OMB No(s).

Form 1040 .....................

Individual (NEW Model)

1545–0074

71751

Status
Approved by OIRA through 1/31/2021.

Link: https://www.federalregister.gov/documents/2019/09/30/2019-21066/proposed-collection-comment-request-forform-1040-form-1040nr-form-1040nr-ez-form-1040x-1040-sr-and
Form 1041 .....................

Trusts and estates ........

1545–0092

Approved by OIRA through 5/3/2022.

Link: https://www.federalregister.gov/documents/2018/04/04/2018-06892/proposed-collection-comment-request-forform-1041
Forms 1065 and 1120 ...

Business (NEW Model)

1545–0123

Approved by OIRA through 1/31/2021.

Link: https://www.federalregister.gov/documents/2019/09/30/2019-21068/proposed-collection-comment-request-forforms-1065-1066-1120-1120-c-1120-f-1120-h-1120-nd-1120-s

III. Regulatory Flexibility Act
It is hereby certified that these final
regulations will not have a significant
economic impact on a substantial
number of small entities within the
meaning of section 601(6) of the
Regulatory Flexibility Act (5 U.S.C.
chapter 6).
Section 168(k) generally affects
taxpayers that own and use depreciable
property in their trades or businesses or
for their production of income. The
reporting burden in § 1.168(k)–2(c)
generally affects taxpayers that elect to
have the 100-percent additional first
year depreciation deduction apply to
components that are acquired or selfconstructed after September 27, 2017, of
depreciable property for which the
manufacture, construction, or
production began before September 28,
2017. The election is made by attaching
a statement to a Federal income tax
Form
Form
Form
Form
Form

return indicating that the taxpayer is
making the election under § 1.168(k)–
2(c) and whether the taxpayer is making
this election for all or some of the
components described in § 1.168(k)–
2(c).
The reporting burden in § 1.1502–
68(c)(4) generally affects taxpayers that
elect to not claim the additional first
year depreciation deduction for
qualified property, and which § 1.1502–
68(c)(1) or (2) would otherwise require
the taxpayer to claim such deduction
when a member of a consolidated group
acquires from another member property
eligible for the additional first year
depreciation deduction (or stock of a
third member holding such property),
and the acquirer member (and acquired
member, if applicable) then leaves the
consolidated group. To make the
election, the corporation must attach a
statement to its timely filed federal
income tax return (including
Gross receipts of $25 million or less

extensions) for the taxable year that
begins after the date on which it leaves
the consolidated group. The statement
must describe the transaction(s) to
which § 1.1502–68(c)(1) or (2) would
apply and state that the corporation
elects not to claim the additional first
year depreciation deduction for any
property transferred in such
transaction(s).
For purposes of the PRA, the Treasury
Department and the IRS estimate that
there are 0 to 41,775 respondents of all
sizes that are likely to be impacted by
the collection of information in
§ 1.168(k)–2(c). Most of these filers are
likely to be small entities (business
entities with gross receipts of $25
million or less pursuant to section
448(c)(1)). The Treasury Department
and the IRS estimate the number of
filers affected by § 1.168(k)–2(c) to be
the following:
Gross receipts over $25 million

1040 .......................................
1065 .......................................
1120 .......................................
1120S ....................................

0–7,000 Respondents (estimated) ............................
0–12,000 Respondents (estimated) ..........................
0–1,500 Respondents (estimated) ............................
0–19,000 Respondents (estimated) ..........................

0–25 Respondents (estimated).
0–500 Respondents (estimated).
0–750 Respondents (estimated).
0–1,000 Respondents (estimated).

Total .........................................

0–39,500 Respondents (estimated) ..........................

0–2,275 Respondents (estimated).

Source: IRS:RAAS:KDA (CDW 5–6–20).

For purposes of the PRA, the Treasury
Department and the IRS estimate that
there are 0 to 500 respondents of all
sizes that are likely to be impacted by
the collection of information in

§ 1.1502–68(c)(4). Only a small number
of these filers are likely to be small
entities, business entities with gross
receipts of $25 million or less pursuant
to section 448(c)(1). The Treasury

Form

Gross receipts of $25 million or less

Form 1120 .......................................

0–67 Respondents (estimated) .................................

Department and the IRS estimate the
number of filers affected by § 1.1502–
68(c)(4)(i) to be the following:

Gross receipts over $25 million
0–433 Respondents (estimated).

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Source: IRS:RAAS:KDA (CDW 5–15–2020).

Regardless of the number of small
entities potentially affected by these
final regulations, the Treasury
Department and the IRS have concluded

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that §§ 1.168(k)–2(c) and 1.1502–
68(c)(4) will not have a significant
economic impact on a substantial
number of small entities. As a result of

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all changes in these final regulations,
the Treasury Department and the IRS
estimate that individual taxpayers who
have gross receipts of $25 million or less

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and experience an increase in burden
will incur an average increase of 0 to 3
hours, and business taxpayers that have
gross receipts of $25 million or less and
experience an increase in burden will
incur an average increase of 0 to 2 hours
(Source: IRS:RAAS (8–28–2019)).
Because the elections in §§ 1.168(k)–2(c)
and 1.1502–68(c)(4) are one of several
changes in these final regulations, the
Treasury Department and the IRS expect
the average increase in burden to be less
for the collections of information in
§§ 1.168(k)–2(c) and 1.1502–68(c)(4)
than the average increase in burden in
the preceding sentence. The Treasury
Department and the IRS also note that
many taxpayers with gross receipts of
$25 million or less may experience a
reduction in burden as a result of all
changes in these final regulations.
Additionally: (1) Many small
businesses are not required to capitalize
under section 263(a) the amount paid or
incurred for the acquisition of
depreciable tangible property that costs
$5,000 or less if the business has an
applicable financial statement or costs
$500 or less if the business does not
have an applicable financial statement,
pursuant to § 1.263(a)–1(f)(1); (2) many
small businesses are no longer required
to capitalize under section 263A the
costs to construct, build, manufacture,
install, improve, raise, or grow
depreciable property if their average
annual gross receipts are $26,000,000 or
less (2020 inflation adjusted amount);
and (3) a small business that capitalizes
costs of depreciable tangible property
may deduct under section 179 up to
$1,040,000 (2020 inflation adjusted
amount) of the cost of such property
placed in service during the taxable year
if the total cost of depreciable tangible
property placed in service during the
taxable year does not exceed $2,590,000
(2020 inflation adjusted amount).
Therefore, the Treasury Department and
the IRS have determined that a
substantial number of small entities will
not be subject to these final regulations.
Further, §§ 1.168(k)–2(c) and 1.1502–
68(c)(4) apply only if the taxpayer
chooses to make an election. Finally, no
comments regarding the economic
impact of these regulations on small
entities were received. Accordingly, the
Secretary of the Treasury’s delegate
certifies that these final regulations will
not have a significant economic impact
on a substantial number of small
entities.
Pursuant to section 7805(f) of the
Code, the proposed rule preceding this
final rule was submitted to the Chief
Counsel for the Office of Advocacy of
the Small Business Administration for
comment on its impact on small

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business, and no comments were
received from the Chief Counsel for the
Office of Advocacy of the Small
Business Administration.
IV. Unfunded Mandates Reform Act
Section 202 of the Unfunded
Mandates Reform Act of 1995 requires
that agencies assess anticipated costs
and benefits and take certain other
actions before issuing a final rule that
includes any Federal mandate that may
result in expenditures in any one year
by a state, local, or tribal government, in
the aggregate, or by the private sector, of
$100 million in 1995 dollars, updated
annually for inflation. In 2019, that
threshold is approximately $154
million. These final regulations do not
include any Federal mandate that may
result in expenditures by state, local, or
tribal governments, or by the private
sector in excess of that threshold.
V. Executive Order 13132: Federalism
Executive Order 13132 (entitled
‘‘Federalism’’) prohibits an agency from
publishing any rule that has federalism
implications if the rule either imposes
substantial, direct compliance costs on
state and local governments, and is not
required by statute, or preempts state
law, unless the agency meets the
consultation and funding requirements
of section 6 of the Executive order.
These final regulations do not have
federalism implications and do not
impose substantial direct compliance
costs on state and local governments or
preempt state law within the meaning of
the Executive order.
VI. Congressional Review Act
The Administrator of the Office of
Information and Regulatory Affairs of
the OMB has determined that this
Treasury decision is a major rule for
purposes of the Congressional Review
Act (5 U.S.C. 801 et seq.) (CRA). Under
section 801(3) of the CRA, a major rule
takes effect 60 days after the rule is
published in the Federal Register.
Accordingly, the Treasury Department
and IRS are adopting these final
regulations with the delayed effective
date generally prescribed under the
Congressional Review Act.
Drafting Information
The principal authors of these final
regulations are Kathleen Reed and
Elizabeth R. Binder of the Office of
Associate Chief Counsel (Income Tax
and Accounting). However, other
personnel from the Treasury
Department and the IRS participated in
their development.

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List of Subjects in 26 CFR Part 1
Income taxes, Reporting and
recordkeeping requirements.
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 1 is
amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation
for part 1 is amended by adding an entry
for § 1.1502–68 in numerical order to
read in part as follows:
Authority: 26 U.S.C. 7805 * * *

*

*

*

*

*

Section 1.1502–68 also issued under 26
U.S.C. 1502.

*

*
*
*
*
Par. 2. Section 1.168(b)–1 is amended
by:
■ 1. Revising paragraph (a)(5)(i)(A);
■ 2. In paragraph (b)(2)(i), removing
‘‘paragraphs (b)(2)(ii) and (iii)’’ and
adding ‘‘paragraphs (b)(2)(ii) through
(iv)’’ in its place; and
■ 3. Adding paragraph (b)(2)(iv).
The addition and revision read as
follows:
■

§ 1.168(b)–1

Definitions.

(a) * * *
(5) * * *
(i) * * *
(A) For purposes of section 168(e)(6),
the improvement is made by the
taxpayer and is placed in service by the
taxpayer after December 31, 2017;
*
*
*
*
*
(b) * * *
(2) * * *
(iv) Addition of language in
paragraph (a)(5)(i)(A) of this section.
The language ‘‘is made by the taxpayer
and’’ in paragraph (a)(5)(i)(A) of this
section applies to property placed in
service by the taxpayer after December
31, 2017.
■ Par. 3. Section 1.168(k)–0 is amended
under § 1.168(k)–2 by:
■ 1. Adding entries for (b)(3)(iii)(C),
(b)(3)(v), (b)(5)(iii)(G), (b)(5)(v), (c), (c)(1)
and (2), (c)(2)(i) through (iv), (c)(3),
(c)(3)(i) through (iii), (c)(4), (c)(4)(i) and
(ii), (c)(5), (c)(5)(i) and (ii), (c)(6),
(c)(6)(i) and (ii), (c)(7), (c)(7)(i) and (ii),
and (c)(8) and (c)(9);
■ 2. Revising the entry for (d)(3)(iv);
■ 3. Adding entries for (d)(4), (f)(7), and
(g)(11);
■ 4. Revising the entries for (h)(2) and
(3); and
■ 5. Adding entries for (h)(3)(i) through
(iii).
The additions and revisions read as
follows:
§ 1.168(k)–0

*

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(iii) Bound by early application.

§ 1.168(k)–2 Additional first year
depreciation deduction for property
acquired and placed in service after
September 27, 2017.

*

*

*

*

*

(b) * * *
(3) * * *
(iii) * * *
(C) Special rules for a series of related
transactions.

*

*

*

*

*

(v) Application to members of a
consolidated group.

*

*

*

*

*

(5) * * *
(iii) * * *
(G) Acquisition of a trade or business or an
entity.

*

*

*

*

*

(v) Determination of acquisition date for
property not acquired pursuant to a written
binding contract.

*

*

*

*

*

(c) Election for components of larger selfconstructed property for which the
manufacture, construction, or production
begins before September 28, 2017.
(1) In general.
(2) Eligible larger self-constructed property.
(i) In general.
(ii) Residential rental property or
nonresidential real property.
(iii) Beginning of manufacture,
construction, or production.
(iv) Exception.
(3) Eligible components.
(i) In general.
(ii) Acquired components.
(iii) Self-constructed components.
(4) Special rules.
(i) Installation costs.
(ii) Property described in section
168(k)(2)(B).
(5) Computation of additional first year
depreciation deduction.
(i) Election is made.
(ii) Election is not made.
(6) Time and manner for making election.
(i) Time for making election.
(ii) Manner of making election.
(7) Revocation of election.
(i) In general.
(ii) Automatic 6-month extension.
(8) Additional procedural guidance.
(9) Examples.
(d) * * *
(3) * * *
(iv) Determination of acquisition date for
property not acquired pursuant to a written
binding contract.
(4) Examples.

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*

*

*

*

*

(f) * * *
(7) Additional procedural guidance.
(g) * * *
(11) Mid-quarter convention.
(h) * * *
(2) Applicability of this section for prior
taxable years.
(3) Early application of this section and
§ 1.1502–68.
(i) In general.
(ii) Early application to certain
transactions.

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Par. 4. Section 1.168(k)–2 is amended
by:
■ 1. At the end of paragraph (a)(1),
removing the period and adding ‘‘,
except as provided in paragraph (c) of
this section.’’ in its place;
■ 2. In paragraph (a)(2)(iv)(B), removing
‘‘an asset’’ and adding ‘‘the asset’’ in its
place;
■ 3. After the semicolon at the end of
paragraph (a)(2)(iv)(C), adding the word
‘‘or’’;
■ 4. In paragraph (a)(2)(iv)(D), removing
‘‘; or’’ and adding a period in its place;
■ 5. Removing paragraph (a)(2)(iv)(E);
■ 6. Revising paragraphs (b)(2)(ii)(F) and
(G);
■ 7. Adding paragraphs (b)(2)(iii)(F)
through (I);
■ 8. Revising the second and third
sentences in paragraph (b)(3)(iii)(B)(1);
■ 9. Adding paragraphs (b)(3)(iii)(B)(4),
(b)(3)(iii)(C), (b)(3)(v), and (b)(3)(vii)(Y)
through (OO);
■ 10. Revising the last sentence in
paragraph (b)(5)(ii)(A);
■ 11. In the first sentence in paragraph
(b)(5)(iii)(A), removing the word ‘‘A’’ at
the beginning of the sentence and
adding ‘‘Except as provided in
paragraph (b)(5)(iii)(G) of this section,
a’’ in its place;
■ 12. In the first sentence in paragraph
(b)(5)(iii)(B), removing the word ‘‘A’’ at
the beginning of the sentence and
adding ‘‘Except as provided in
paragraph (b)(5)(iii)(G) of this section,
a’’ in its place;
■ 13. Adding paragraph (b)(5)(iii)(G);
■ 14. In the fourth sentence in
paragraph (b)(5)(iv)(C)(1), removing the
period at the end of the sentence and
adding ‘‘, except as provided in
paragraph (c) of this section.’’ in its
place;
■ 15. In the fourth sentence in
paragraph (b)(5)(iv)(C)(2), removing the
period at the end of the sentence and
adding ‘‘, except as provided in
paragraph (c) of this section.’’ in its
place;
■ 16. Adding paragraph (b)(5)(v);
■ 17. Revising the second sentence in
paragraph (b)(5)(viii) introductory text;
■ 18. Adding paragraph (c);
■ 19. Redesignating paragraph (d)(3)(iv)
as paragraph (d)(4) and adding new
paragraph (d)(3)(iv);
■ 20. Adding three sentences at the end
of paragraph (e)(1)(iii);
■ 21. In paragraph (f)(1)(ii)(D), removing
‘‘(a)(5)(ii),’’ and adding ‘‘(a)(5)(ii)
(acquired by the taxpayer after
September 27, 2017, and placed in
service by the taxpayer after September
27, 2017, and before January 1, 2018),’’
in its place;
■ 22. In paragraph (f)(1)(ii)(G), removing
the word ‘‘A’’ at the beginning of the
■

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sentence and adding the word ‘‘Each’’ in
its place;
■ 23. Adding paragraph (f)(7);
■ 24. In paragraph (g)(1)(i):
■ i. In the first sentence, after
‘‘paragraphs (g)(1)(ii) and (iii) of this
section’’ adding ‘‘and by the application
of paragraph (b)(3)(iii)(B)(4) of this
section’’; and
■ ii. In the last sentence, removing the
period at the end of the sentence and
adding ‘‘, except as otherwise provided
by the application of paragraph
(b)(3)(iii)(B) of this section.’’ in its place;
■ 25. Adding paragraph (g)(11); and
■ 26. Revising paragraphs (h)(1), (2),
and (3).
The additions and revisions read as
follows:
§ 1.168(k)–2 Additional first year
depreciation deduction for property
acquired and placed in service after
September 27, 2017.

*

*
*
*
*
(b) * * *
(2) * * *
(ii) * * *
(F) Primarily used in a trade or
business described in section
163(j)(7)(A)(iv) and §§ 1.163(j)–
1(b)(15)(i) and 1.163(j)–
10(c)(3)(iii)(C)(3), and placed in service
by the taxpayer in any taxable year
beginning after December 31, 2017. For
purposes of section 168(k)(9)(A) and
this paragraph (b)(2)(ii)(F), the term
primarily used has the same meaning as
that term is used in § 1.167(a)–
11(b)(4)(iii)(b) and (e)(3)(iii) for
classifying property. This paragraph
(b)(2)(ii)(F) does not apply to property
that is leased to a lessee’s trade or
business described in section
163(j)(7)(A)(iv) and §§ 1.163(j)–
1(b)(15)(i) and 1.163(j)–
10(c)(3)(iii)(C)(3), by a lessor’s trade or
business that is not described in section
163(j)(7)(A)(iv) and §§ 1.163(j)–
1(b)(15)(i) and 1.163(j)–10(c)(3)(iii)(C)(3)
for the taxable year; or
(G) Used in a trade or business that
has had floor plan financing
indebtedness, as defined in section
163(j)(9)(B) and § 1.163(j)–1(b)(18), if the
floor plan financing interest expense, as
defined in section 163(j)(9)(A) and
§ 1.163(j)–1(b)(19), related to such
indebtedness is taken into account
under section 163(j)(1)(C) for the taxable
year. Such property also must be placed
in service by the taxpayer in any taxable
year beginning after December 31, 2017.
Solely for purposes of section
168(k)(9)(B) and this paragraph
(b)(2)(ii)(G), floor plan financing interest
expense is taken into account for the
taxable year by a trade or business that
has had floor plan financing

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indebtedness only if the business
interest expense, as defined in section
163(j)(5) and § 1.163(j)–1(b)(3), of the
trade or business for the taxable year
(which includes floor plan financing
interest expense) exceeds the sum of the
amounts calculated under section
163(j)(1)(A) and (B) for the trade or
business for the taxable year. If the trade
or business has taken floor plan
financing interest expense into account
pursuant to this paragraph (b)(2)(ii)(G)
for a taxable year, this paragraph
(b)(2)(ii)(G) applies to any property
placed in service by that trade or
business in that taxable year. This
paragraph (b)(2)(ii)(G) does not apply to
property that is leased to a lessee’s trade
or business that has had floor plan
financing indebtedness, by a lessor’s
trade or business that has not had floor
plan financing indebtedness during the
taxable year or that has had floor plan
financing indebtedness but did not take
into account floor plan financing
interest expense for the taxable year
pursuant to this paragraph (b)(2)(ii)(G).
(iii) * * *
(F) Example 6. In 2019, a financial
institution buys new equipment for $1
million and then leases this equipment
to a lessee that primarily uses the
equipment in a trade or business
described in section 163(j)(7)(A)(iv) and
§§ 1.163(j)–1(b)(15)(i) and 1.163(j)–
10(c)(3)(iii)(C)(3). The financial
institution is not described in section
163(j)(7)(A)(iv) and §§ 1.163(j)–
1(b)(15)(i) and § 1.163(j)–
10(c)(3)(iii)(C)(3). As a result, paragraph
(b)(2)(ii)(F) of this section does not
apply to this new equipment. Assuming
all other requirements are met, the
financial institution’s purchase price of
$1 million for the new equipment
qualifies for the additional first year
depreciation deduction under this
section.
(G) Example 7. During its taxable year
beginning in 2020, F, a corporation that
is an automobile dealer, buys new
computers for $50,000 for use in its
trade or business of selling automobiles.
For purposes of section 163(j), F has the
following for 2020: $700 of adjusted
taxable income, $40 of business interest
income, $400 of business interest
expense (which includes $100 of floor
plan financing interest expense). The
sum of the amounts calculated under
section 163(j)(1)(A) and (B) for F for
2020 is $390 ($40 + ($700 × 50 percent)).
F’s business interest expense, which
includes floor plan financing interest
expense, for 2020 is $400. As a result,
F’s floor plan financing interest expense
is taken into account by F for 2020
pursuant to paragraph (b)(2)(ii)(G) of
this section. Accordingly, F’s purchase

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price of $50,000 for the computers does
not qualify for the additional first year
depreciation deduction under this
section.
(H) Example 8. The facts are the same
as in Example 7 in paragraph
(b)(2)(iii)(G) of this section, except F
buys new computers for $30,000 for use
in its trade or business of selling
automobiles and, for purposes of section
163(j), F has $1,300 of adjusted taxable
income. The sum of the amounts
calculated under section 163(j)(1)(A)
and (B) for F for 2020 is $690 ($40 +
($1,300 × 50 percent)). F’s business
interest expense, which includes floor
plan financing interest expense, for
2020 is $400. As a result, F’s floor plan
financing interest expense is not taken
into account by F for 2020 pursuant to
paragraph (b)(2)(ii)(G) of this section.
Assuming all other requirements are
met, F’s purchase price of $30,000 for
the computers qualifies for the
additional first year depreciation
deduction under this section.
(I) Example 9. (1) G, a calendar-year
taxpayer, owns an office building for
use in its trade or business and G placed
in service such building in 2000. In
November 2018, G made and placed in
service an improvement to the inside of
such building at a cost of $100,000. In
January 2019, G entered into a written
contract with H for H to construct an
improvement to the inside of the
building. In March 2019, H completed
construction of the improvement at a
cost of $750,000 and G placed in service
such improvement. Both improvements
to the building are section 1250
property and are not described in
§ 1.168(b)–1(a)(5)(ii).
(2) Both the improvement to the office
building made by G in November 2018
and the improvement to the office
building that was constructed by H for
G in 2019 are improvements made by G
under § 1.168(b)–1(a)(5)(i)(A). Further,
each improvement is made to the inside
of the office building, is section 1250
property, and is not described in
§ 1.168(b)–1(a)(5)(ii). As a result, each
improvement meets the definition of
qualified improvement property in
section 168(e)(6) and § 1.168(b)–
1(a)(5)(i)(A) and (a)(5)(ii). Accordingly,
each improvement is 15-year property
under section 168(e)(3) and is described
in § 1.168(k)–2(b)(2)(i)(A). Assuming all
other requirements of this section are
met, each improvement made by G
qualifies for the additional first year
depreciation deduction for G under this
section.
(3) * * *
(iii) * * *
(B) * * *

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(1) * * * To determine if the taxpayer
or a predecessor had a depreciable
interest in the property at any time prior
to the acquisition, only the five calendar
years immediately prior to the current
calendar year in which the property is
placed in service by the taxpayer, and
the portion of such current calendar
year before the placed-in-service date of
the property without taking into account
the applicable convention, are taken
into account (lookback period). If either
the taxpayer or a predecessor, or both,
have not been in existence for the entire
lookback period, only the portion of the
lookback period during which the
taxpayer or a predecessor, or both, as
applicable, have been in existence is
taken into account to determine if the
taxpayer or a predecessor had a
depreciable interest in the property at
any time prior to the acquisition. * * *
(4) De minimis use of property. If a
taxpayer acquires and places in service
property, the taxpayer or a predecessor
did not previously have a depreciable
interest in the property, the taxpayer
disposes of the property to an unrelated
party within 90 calendar days after the
date the property was originally placed
in service by the taxpayer, without
taking into account the applicable
convention, and the taxpayer reacquires
and again places in service the property,
then the taxpayer’s depreciable interest
in the property during that 90-day
period is not taken into account for
determining whether the property was
used by the taxpayer or a predecessor at
any time prior to its reacquisition by the
taxpayer under paragraphs
(b)(3)(iii)(A)(1) and (b)(3)(iii)(B)(1) of
this section. If the taxpayer originally
acquired the property before September
28, 2017, as determined under
§ 1.168(k)–1(b)(4), and the taxpayer
reacquires and again places in service
the property during the same taxable
year the taxpayer disposed of the
property to the unrelated party, then
this paragraph (b)(3)(iii)(B)(4) does not
apply. For purposes of this paragraph
(b)(3)(iii)(B)(4), an unrelated party is a
person not described in section
179(d)(2)(A) or (B), and § 1.179–
4(c)(1)(ii) or (iii) or (c)(2).
(C) Special rules for a series of related
transactions—(1) In general. Solely for
purposes of paragraph (b)(3)(iii) of this
section, each transferee in a series of
related transactions tests its relationship
under section 179(d)(2)(A) or (B) with
the transferor from which the transferee
directly acquires the depreciable
property (immediate transferor) and
with the original transferor of the
depreciable property in the series. The
transferee is treated as related to the
immediate transferor or the original

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transferor if the relationship exists
either when the transferee acquires, or
immediately before the first transfer of,
the depreciable property in the series. A
series of related transactions may
include, for example, a transfer of
partnership assets followed by a transfer
of an interest in the partnership that
owned the assets; or a disposition of
property and a disposition, directly or
indirectly, of the transferor or transferee
of the property. For special rules that
may apply when the transferor and
transferee of the property are members
of a consolidated group, as defined in
§ 1.1502–1(h), see § 1.1502–68.
(2) Special rules—(i) Property placed
in service and disposed of in same
taxable year or property not placed in
service. Any party in a series of related
transactions that is neither the original
transferor nor the ultimate transferee is
disregarded (disregarded party) for
purposes of testing the relationships
under paragraph (b)(3)(iii)(C)(1) of this
section if the party places in service and
disposes of the depreciable property
subject to the series, other than in a
transaction described in paragraph
(g)(1)(iii) of this section, during the
party’s same taxable year, or if the party
does not place in service the depreciable
property subject to the series for use in
the party’s trade or business or
production of income. In either case, the
party to which the disregarded party
disposed of the depreciable property
tests its relationship with the party from
which the disregarded party acquired
the depreciable property and with the
original transferor of the depreciable
property in the series. If the series has
consecutive disregarded parties, the
party to which the last disregarded party
disposed of the depreciable property
tests its relationship with the party from
which the first disregarded party
acquired the depreciable property and
with the original transferor of the
depreciable property in the series. The
rules for testing the relationships in
paragraph (b)(3)(iii)(C)(1) of this section
continue to apply for the other
transactions in the series.
(ii) All section 168(i)(7) transactions.
This paragraph (b)(3)(iii)(C) does not
apply if all transactions in a series of
related transactions are described in
paragraph (g)(1)(iii) of this section
(section 168(i)(7) transactions in which
property is transferred in the same
taxable year that the property is placed
in service by the transferor).
(iii) One or more section 168(i)(7)
transactions. Any step in a series of
related transactions that is neither the
original step nor the ultimate step is
disregarded (disregarded step) for
purposes of testing the relationships

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under paragraph (b)(3)(iii)(C)(1) of this
section if the step is a transaction
described in paragraph (g)(1)(iii) of this
section. In this case, the relationship is
not tested between the transferor and
transferee of that transaction. Instead,
the relationship is tested between the
transferor in the disregarded step and
the party to which the transferee in the
disregarded step disposed of the
depreciable property, the transferee in
the disregarded step and the party to
which the transferee in the disregarded
step disposed of the depreciable
property, and the original transferor of
the depreciable property in the series
and the party to which the transferee in
the disregarded step disposed of the
depreciable property. If the series has
consecutive disregarded steps, the
relationship is tested between the
transferor in the first disregarded step
and the party to which the transferee in
the last disregarded step disposed of the
depreciable property, the transferee in
the last disregarded step and the party
to which the transferee in the last
disregarded step disposed of the
depreciable property, and the original
transferor of the depreciable property in
the series and the party to which the
transferee in the last disregarded step
disposed of the depreciable property.
The rules for testing the relationships in
paragraph (b)(3)(iii)(C)(1) of this section
continue to apply for the other
transactions in the series.
(iv) Syndication transaction. This
paragraph (b)(3)(iii)(C) does not apply to
a syndication transaction described in
paragraph (b)(3)(vi) of this section.
(v) Certain relationships disregarded.
If a party acquires depreciable property
in a series of related transactions in
which the party acquires stock, meeting
the requirements of section 1504(a)(2),
of a corporation in a fully taxable
transaction followed by a liquidation of
the acquired corporation under section
331, any relationship created as part of
such series of related transactions is
disregarded in determining whether any
party is related to such acquired
corporation for purposes of testing the
relationships under paragraph
(b)(3)(iii)(C)(1) of this section.
(vi) Transferors that cease to exist for
Federal tax purposes. Any transferor in
a series of related transactions that
ceases to exist for Federal tax purposes
during the series is deemed, for
purposes of testing the relationships
under paragraph (b)(3)(iii)(C)(1) of this
section, to be in existence at the time of
any transfer in the series.
(vii) Newly created party. If a
transferee in a series of related
transactions acquires depreciable
property from a transferor that was not

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in existence immediately prior to the
first transfer of such property in such
series (new transferor), the transferee
tests its relationship with the party from
which the new transferor acquired such
property and with the original transferor
of the depreciable property in the series
for purposes of paragraph
(b)(3)(iii)(C)(1) of this section. If the
series has consecutive new transferors,
the party to which the last new
transferor disposed of the depreciable
property tests its relationship with the
party from which the first new
transferor acquired the depreciable
property and with the original transferor
of the depreciable property in the series.
The rules for testing the relationships in
paragraph (b)(3)(iii)(C)(1) of this section
continue to apply for the other
transactions in the series.
(viii) Application of paragraph (g)(1)
of this section. Paragraph (g)(1) of this
section applies to each step in a series
of related transactions.
*
*
*
*
*
(v) Application to members of a
consolidated group. For rules applicable
to the acquisition of depreciable
property by a member of a consolidated
group, see § 1.1502–68.
*
*
*
*
*
(vii) * * *
(Y) Example 25. (1) JL is a fiscal year
taxpayer with a taxable year ending June
30. On April 22, 2020, JL acquires and
places in service a new machine for use
in its trade or business. On May 1, 2022,
JL sells this machine to JM, an unrelated
party, for use in JM’s trade or business.
JM is a fiscal year taxpayer with a
taxable year ending March 31. On
February 1, 2023, JL buys the machine
from JM and places the machine in
service. JL uses the machine in its trade
or business for the remainder of its
taxable year ending June 30, 2023.
(2) JL’s acquisition of the machine on
April 22, 2020, satisfies the original use
requirement in paragraph (b)(3)(ii) of
this section. Assuming all other
requirements are met, JL’s purchase
price of the machine qualifies for the
additional first year depreciation
deduction for JL for the taxable year
ending June 30, 2020, under this
section.
(3) JM placed in service the machine
on May 1, 2022, and disposed of it on
February 1, 2023. As a result, JM placed
in service and disposed of the machine
during the same taxable year (JM’s
taxable year beginning April 1, 2022,
and ending March 31, 2023).
Accordingly, JM’s acquisition of the
machine on May 1, 2022, does not
qualify for the additional first year

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depreciation deduction pursuant to
paragraph (g)(1)(i) of this section.
(4) Pursuant to paragraph
(b)(3)(iii)(B)(1) of this section, the
lookback period is calendar years 2018
through 2022 and January 1, 2023,
through January 31, 2023, to determine
if JL had a depreciable interest in the
machine when JL reacquired it on
February 1, 2023. As a result, JL’s
depreciable interest in the machine
during the period April 22, 2020, to
April 30, 2022, is taken into account for
determining whether the machine was
used by JL or a predecessor at any time
prior to its reacquisition by JL on
February 1, 2023. Accordingly, the
reacquisition of the machine by JL on
February 1, 2023, does not qualify for
the additional first year depreciation
deduction.
(Z) Example 26. (1) EF has owned and
had a depreciable interest in Property
since 2012. On January 1, 2016, EF
contributes assets (not including
Property) to existing Partnership T in a
transaction described in section 721, in
exchange for a partnership interest in
Partnership T, and Partnership T placed
in service these assets for use in its trade
or business. On July 1, 2016, EF sells
Property to EG, a party unrelated to
either EF or Partnership T. On April 1,
2018, Partnership T buys Property from
EG and places it in service for use in its
trade or business.
(2) EF is not Partnership T’s
predecessor with respect to Property
within the meaning of paragraph
(a)(2)(iv)(B) of this section. Pursuant to
paragraph (b)(3)(iii)(B)(1) of this section,
the lookback period is 2013–2017, plus
January through March 2018, to
determine if Partnership T had a
depreciable interest in Property that
Partnership T acquired on April 1, 2018.
EF need not be examined in the
lookback period to see if EF had a
depreciable interest in Property, because
EF is not Partnership T’s predecessor.
Because Partnership T did not have a
depreciable interest in Property in the
lookback period prior to its acquisition
of Property on April 1, 2018,
Partnership T’s acquisition of Property
on April 1, 2018, satisfies the used
property acquisition requirement of
paragraph (b)(3)(iii)(B)(1) of this section.
Assuming all other requirements of this
section are satisfied, Partnership T’s
purchase price of Property qualifies for
the additional first year depreciation
deduction under this section.
(AA) Example 27. (1) The facts are the
same as in Example 26 of paragraph
(b)(3)(vii)(Z)(1) of this section, except
that on January 1, 2016, EF’s
contribution of assets to Partnership T

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includes Property. On July 1, 2016,
Partnership T sells Property to EG.
(2) Partnership T’s acquisition of
Property on January 1, 2016, does not
satisfy the original use requirement of
§ 1.168(k)–1(b)(3) and is not eligible for
the additional first year depreciation
deduction under section 168(k) as in
effect prior to the enactment of the Act.
(3) With respect to Partnership T’s
acquisition of Property on April 1, 2018,
EF is Partnership T’s predecessor with
respect to Property within the meaning
of paragraph (a)(2)(iv)(B) of this section.
Pursuant to paragraph (b)(3)(iii)(B)(1) of
this section, the lookback period is
2013–2017, plus January through March
2018, to determine if EF or Partnership
T had a depreciable interest in Property
that Partnership T acquired on April 1,
2018. Because EF had a depreciable
interest in Property from 2013 to 2015
and Partnership T had a depreciable
interest in Property from January
through June 2016, Partnership T’s
acquisition of Property on April 1, 2018,
does not satisfy the used property
acquisition requirement of paragraph
(b)(3)(iii)(B)(1) of this section and is not
eligible for the additional first year
depreciation deduction.
(BB) Example 28. (1) X Corporation
has owned and had a depreciable
interest in Property since 2012. On
January 1, 2015, X Corporation sold
Property to Q, an unrelated party. Y
Corporation is formed July 1, 2015. On
January 1, 2016, Y Corporation merges
into X Corporation in a transaction
described in section 368(a)(1)(A). On
April 1, 2018, X Corporation buys
Property from Q and places it in service
for use in its trade or business.
(2) Pursuant to paragraph (a)(2)(iv)(A)
of this section, Y Corporation is X
Corporation’s predecessor. Pursuant to
paragraph (b)(3)(iii)(B)(1) of this section,
the lookback period is 2013–2017, plus
January through March 2018, to
determine if Y Corporation or X
Corporation had a depreciable interest
in Property that X Corporation acquired
on April 1, 2018. Y Corporation did not
have a depreciable interest in Property
at any time during the lookback period.
Because X Corporation had a
depreciable interest in Property from
2013 through 2014, X Corporation’s
acquisition of Property on April 1, 2018,
does not satisfy the used property
acquisition requirement of paragraph
(b)(3)(iii)(B)(1) of this section and is not
eligible for the additional first year
depreciation deduction.
(CC) Example 29. (1) Y Corporation
has owned and had a depreciable
interest in Property since 2012. On
January 1, 2015, Y Corporation sells
Property to Q, an unrelated party. X

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Corporation is formed on July 1, 2015.
On January 1, 2016, Y Corporation
merges into X Corporation in a
transaction described in section
368(a)(1)(A). On April 1, 2018, X
Corporation buys Property from Q and
places it in service for use in its trade
or business.
(2) Pursuant to paragraph (a)(2)(iv)(A)
of this section, Y Corporation is X
Corporation’s predecessor. Pursuant to
paragraph (b)(3)(iii)(B)(1) of this section,
the lookback period is 2013–2017, plus
January through March 2018, to
determine if X Corporation or Y
Corporation had a depreciable interest
in Property that X Corporation acquired
on April 1, 2018. Because Y Corporation
had a depreciable interest in Property
from 2013 through 2014, X
Corporation’s acquisition of Property on
April 1, 2018, does not satisfy the used
property acquisition requirement of
paragraph (b)(3)(iii)(B)(1) of this section
and is not eligible for the additional first
year depreciation deduction.
(DD) Example 30. (1) On September 5,
2017, Y, a calendar-year taxpayer,
acquires and places in service a new
machine (Machine #1), and begins using
Machine #1 in its manufacturing trade
or business. On November 1, 2017, Y
sells Machine #1 to Z, then Z leases
Machine #1 back to Y for 4 years, and
Y continues to use Machine #1 in its
manufacturing trade or business. The
lease agreement contains a purchase
option provision allowing Y to buy
Machine #1 at the end of the lease term.
On November 1, 2021, Y exercises the
purchase option in the lease agreement
and buys Machine #1 from Z. The lease
between Y and Z for Machine #1 is a
true lease for Federal tax purposes.
(2) Because Y, a calendar-year
taxpayer, placed in service and disposed
of Machine #1 during 2017, Machine #1
is not eligible for the additional first
year depreciation deduction for Y
pursuant to § 1.168(k)–1(f)(1)(i).
(3) The use of Machine #1 by Y
prevents Z from satisfying the original
use requirement of paragraph (b)(3)(ii)
of this section. However, Z’s acquisition
of Machine #1 satisfies the used
property acquisition requirements of
paragraph (b)(3)(iii) of this section.
Assuming all other requirements are
met, Z’s purchase price of Machine #1
qualifies for the additional first year
depreciation deduction for Z under this
section.
(4) During 2017, Y sold Machine #1
within 90 calendar days of placing
Machine #1 in service originally on
September 5, 2017. Pursuant to
paragraph (b)(3)(iii)(B)(4) of this section,
Y’s depreciable interest in Machine #1
during that 90-day period is not taken

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into account for determining whether
Machine #1 was used by Y or a
predecessor at any time prior to its
reacquisition by Y on November 1,
2021. Accordingly, assuming all other
requirements are met, Y’s purchase
price of Machine #1 on November 1,
2021, qualifies for the additional first
year depreciation deduction for Y under
this section.
(EE) Example 31. (1) On October 15,
2019, FA, a calendar-year taxpayer, buys
and places in service a new machine for
use in its trade or business. On January
10, 2020, FA sells this machine to FB for
use in FB’s trade or business. FB is a
calendar-year taxpayer and is not
related to FA. On March 30, 2020, FA
buys the machine from FB and places
the machine in service. FA uses the
machine in its trade or business for the
remainder of 2020.
(2) FA’s acquisition of the machine on
October 15, 2019, satisfies the original
use requirement in paragraph (b)(3)(ii)
of this section. Assuming all other
requirements are met, FA’s purchase
price of the machine qualifies for the
additional first year depreciation
deduction for FA for the 2019 taxable
year under this section.
(3) Because FB placed in service the
machine on January 10, 2020, and
disposed of it on March 30, 2020, FB’s
acquisition of the machine on January
10, 2020, does not qualify for the
additional first year depreciation
deduction pursuant to § 1.168(k)–
2(g)(1)(i).
(4) FA sold the machine to FB in 2020
and within 90 calendar days of placing
the machine in service originally on
October 15, 2019. Pursuant to paragraph
(b)(3)(iii)(B)(4) of this section, FA’s
depreciable interest in the machine
during that 90-day period is not taken
into account for determining whether
the machine was used by FA or a
predecessor at any time prior to its
reacquisition by FA on March 30, 2020.
Accordingly, assuming all other
requirements are met, FA’s purchase
price of the machine on March 30, 2020,
qualifies for the additional first year
depreciation deduction for FA for the
2020 taxable year under this section.
(FF) Example 32. (1) The facts are the
same as in Example 31 of paragraph
(b)(3)(vii)(EE)(1) of this section, except
that on November 1, 2020, FB buys the
machine from FA and places the
machine in service. FB uses the machine
in its trade or business for the remainder
of 2020.
(2) Because FA placed in service the
machine on March 30, 2020, and
disposed of it on November 1, 2020,
FA’s reacquisition of the machine on
March 30, 2020, does not qualify for the

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additional first year depreciation
deduction pursuant to paragraph
(g)(1)(i) of this section.
(3) During 2020, FB sold the machine
to FA within 90 calendar days of placing
the machine in service originally on
January 10, 2020. After FB reacquired
the machine on November 1, 2020, FB
did not dispose of the property during
the remainder of 2020. Pursuant to
paragraph (b)(3)(iii)(B)(4) of this section,
FB’s depreciable interest in the machine
during that 90-day period is not taken
into account for determining whether
the machine was used by FB or a
predecessor at any time prior to its
reacquisition by FB on November 1,
2020. Accordingly, assuming all other
requirements are met, FB’s purchase
price of the machine on November 1,
2020, qualifies for the additional first
year depreciation deduction for FB
under this section.
(GG) Example 33. (1) The facts are the
same as in Example 32 of paragraph
(b)(3)(vii)(FF)(1) of this section, except
FB sells the machine to FC, an unrelated
party, on December 31, 2020.
(2) Because FB placed in service the
machine on November 1, 2020, and
disposed of it on December 31, 2020,
FB’s reacquisition of the machine on
November 1, 2020, does not qualify for
the additional first year depreciation
deduction pursuant to paragraph
(g)(1)(i) of this section.
(3) FC’s acquisition of the machine on
December 31, 2020, satisfies the used
property acquisition requirement of
paragraph (b)(3)(iii)(A)(2) of this section.
Accordingly, assuming all other
requirements of this section are
satisfied, FC’s purchase price of the
machine qualifies for the additional first
year depreciation deduction under this
section.
(HH) Example 34. (1) In August 2017,
FD, a calendar-year taxpayer, entered
into a written binding contract with X
for X to manufacture a machine for FD
for use in its trade or business. Before
September 28, 2017, FD incurred more
than 10 percent of the total cost of the
machine. On February 8, 2020, X
delivered the machine to FD and FD
placed in service the machine. The
machine is property described in
section 168(k)(2)(B) as in effect on the
day before the date of the enactment of
the Act. FD’s entire unadjusted
depreciable basis of the machine is
attributable to the machine’s
manufacture before January 1, 2020. FD
uses the safe harbor test in § 1.168(k)–
1(b)(4)(iii)(B)(2) to determine when
manufacturing of the machine began.
On March 26, 2020, FD sells the
machine to FE for use in FE’s trade or
business. FE is a calendar-year taxpayer

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and is not related to FD. On November
7, 2020, FD buys the machine from FE
and places in service the machine. FD
uses the machine in its trade or business
for the remainder of 2020.
(2) Because FD incurred more than 10
percent of the cost of the machine before
September 28, 2017, and FD uses the
safe harbor test in § 1.168(k)–
1(b)(4)(iii)(B)(2) to determine when the
manufacturing of the machine began, FD
acquired the machine before September
28, 2017. If FD had not disposed of the
machine on March 26, 2020, the cost of
the machine would have qualified for
the 30-percent additional first year
depreciation deduction pursuant to
section 168(k)(8), assuming all
requirements are met under section
168(k)(2) as in effect on the day before
the date of the enactment of the Act.
However, because FD placed in service
the machine on February 8, 2020, and
disposed of it on March 26, 2020, FD’s
acquisition of the machine on February
8, 2020, does not qualify for the
additional first year depreciation
deduction pursuant to § 1.168(k)–
1(f)(1)(i).
(3) Because FE placed in service the
machine on March 26, 2020, and
disposed of it on November 7, 2020,
FE’s acquisition of the machine on
March 26, 2020, does not qualify for the
additional first year depreciation
deduction pursuant to paragraph
(g)(1)(i) of this section.
(4) During 2020, FD sold the machine
to FE within 90 calendar days of placing
the machine in service originally on
February 8, 2020. After FD reacquired
the machine on November 7, 2020, FD
did not dispose of the machine during
the remainder of 2020. FD originally
acquired this machine before September
28, 2017. As a result, paragraph
(b)(3)(iii)(B)(4) of this section does not
apply. Pursuant to paragraph
(b)(3)(iii)(B)(1) of this section, the
lookback period is 2015 through 2019
and January 1, 2020, through November
6, 2020, to determine if FD had a
depreciable interest in the machine
when FD reacquired it on November 7,
2020. As a result, FD’s depreciable
interest in the machine during the
period February 8, 2020, to March 26,
2020, is taken into account for
determining whether the machine was
used by FD or a predecessor at any time
prior to its reacquisition by FD on
November 7, 2020. Accordingly, the
reacquisition of the machine by FD on
November 7, 2020, does not qualify for
the additional first year depreciation
deduction.
(II) Example 35. (1) In a series of
related transactions, a father sells a
machine to an unrelated individual on

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December 15, 2019, who sells the
machine to the father’s daughter on
January 2, 2020, for use in the
daughter’s trade or business. Pursuant to
paragraph (b)(3)(iii)(C)(1) of this section,
a transferee tests its relationship with
the transferor from which the transferee
directly acquires the depreciable
property, and with the original
transferor of the depreciable property in
the series. The relationship is tested
when the transferee acquires, and
immediately before the first transfer of,
the depreciable property in the series.
As a result, the following relationships
are tested under section 179(d)(2)(A):
The unrelated individual tests its
relationship to the father as of December
15, 2019; and the daughter tests her
relationship to the unrelated individual
as of January 2, 2020, and December 15,
2019, and to the father as of January 2,
2020, and December 15, 2019.
(2) Because the individual is not
related to the father within the meaning
of section 179(d)(2)(A) and § 1.179–
4(c)(1)(ii) as of December 15, 2019, the
individual’s acquisition of the machine
satisfies the used property acquisition
requirement of paragraph
(b)(3)(iii)(A)(2) of this section.
Accordingly, assuming the unrelated
individual placed the machine in
service for use in its trade or business
in 2019 and all other requirements of
this section are satisfied, the unrelated
individual’s purchase price of the
machine qualifies for the additional first
year depreciation deduction under this
section.
(3) The individual and the daughter
are not related parties within the
meaning of section 179(d)(2)(A) and
§ 1.179–4(c)(1)(ii) as of January 2, 2020,
or December 15, 2019. However, the
father and his daughter are related
parties within the meaning of section
179(d)(2)(A) and § 1.179–4(c)(1)(ii) as of
January 2, 2020, or December 15, 2019.
Accordingly, the daughter’s acquisition
of the machine does not satisfy the used
property acquisition requirements of
paragraph (b)(3)(iii) of this section and
is not eligible for the additional first
year depreciation deduction.
(JJ) Example 36. (1) The facts are the
same as in Example 35 of paragraph
(b)(3)(vii)(II)(1) of this section, except
that instead of selling to an unrelated
individual, the father sells the machine
to his son on December 15, 2019, who
sells the machine to his sister (the
father’s daughter) on January 2, 2020.
Pursuant to paragraph (b)(3)(iii)(C)(1) of
this section, a transferee tests its
relationship with the transferor from
which the transferee directly acquires
the depreciable property, and with the
original transferor of the depreciable

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property in the series. The relationship
is tested when the transferee acquires,
and immediately before the first transfer
of, the depreciable property in the
series. As a result, the following
relationships are tested under section
179(d)(2)(A): The son tests his
relationship to the father as of December
15, 2019; and the daughter tests her
relationship to her brother as of January
2, 2020, and December 15, 2019, and to
the father as of January 2, 2020, and
December 15, 2019.
(2) Because the father and his son are
related parties within the meaning of
section 179(d)(2)(A) and § 1.179–
4(c)(1)(ii) as of December 15, 2019, the
son’s acquisition of the machine does
not satisfy the used property acquisition
requirements of paragraph (b)(3)(iii) of
this section. Accordingly, the son’s
acquisition of the machine is not
eligible for the additional first year
depreciation deduction.
(3) The son and his sister are not
related parties within the meaning of
section 179(d)(2)(A) and § 1.179–
4(c)(1)(ii) as of January 2, 2020, or
December 15, 2019. However, the father
and his daughter are related parties
within the meaning of section
179(d)(2)(A) and § 1.179–4(c)(1)(ii) as of
January 2, 2020, or December 15, 2019.
Accordingly, the daughter’s acquisition
of the machine does not satisfy the used
property acquisition requirements of
paragraph (b)(3)(iii) of this section and
is not eligible for the additional first
year depreciation deduction.
(KK) Example 37. (1) In June 2018,
BA, an individual, bought and placed in
service a new machine from an
unrelated party for use in its trade or
business. In a series of related
transactions, BA sells the machine to BB
and BB places it in service on October
1, 2019, BB sells the machine to BC and
BC places it in service on December 1,
2019, and BC sells the machine to BD
and BD places it in service on January
2, 2020. BA and BB are related parties
within the meaning of section
179(d)(2)(A) and § 1.179–4(c)(1)(ii). BB
and BC are related parties within the
meaning of section 179(d)(2)(B) and
§ 1.179–4(c)(1)(iii). BC and BD are not
related parties within the meaning of
section 179(d)(2)(A) and § 1.179–
4(c)(1)(ii), or section 179(d)(2)(B) and
§ 1.179–4(c)(1)(iii). BA is not related to
BC or to BD within the meaning of
section 179(d)(2)(A) and § 1.179–
4(c)(1)(ii). All parties are calendar-year
taxpayers.
(2) BA’s purchase of the machine in
June 2018 satisfies the original use
requirement of paragraph (b)(3)(ii) of
this section and, assuming all other
requirements of this section are met,

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BA’s purchase price of the machine
qualifies for the additional first year
depreciation deduction under this
section.
(3) Pursuant to paragraph
(b)(3)(iii)(C)(1) of this section, a
transferee tests its relationship with the
transferor from which the transferee
directly acquires the depreciable
property, and with the original
transferor of the depreciable property in
the series. The relationship is tested
when the transferee acquires, and
immediately before the first transfer of,
the depreciable property in the series.
However, because BB placed in service
and disposed of the machine in the
same taxable year, BB is disregarded
pursuant to paragraph (b)(3)(iii)(C)(2)(i)
of this section. As a result, the following
relationships are tested under section
179(d)(2)(A) and (B): BC tests its
relationship to BA as of December 1,
2019, and October 1, 2019; and BD tests
its relationship to BC as of January 2,
2020, and October 1, 2019, and to BA as
of January 2, 2020, and October 1, 2020.
(4) Because BA is not related to BC
within the meaning of section
179(d)(2)(A) and § 1.179–4(c)(1)(ii) as of
December 1, 2019, or October 1, 2019,
BC’s acquisition of the machine satisfies
the used property acquisition
requirement of paragraph
(b)(3)(iii)(A)(2) of this section.
Accordingly, assuming all other
requirements of this section are
satisfied, BC’s purchase price of the
machine qualifies for the additional first
year depreciation deduction under this
section.
(5) Because BC is not related to BD
and BA is not related to BD within the
meaning of section 179(d)(2)(A) and
§ 1.179–4(c)(1)(ii), or section
179(d)(2)(B) and § 1.179–4(c)(1)(iii) as of
January 2, 2020, or October 1, 2019,
BD’s acquisition of the machine satisfies
the used property acquisition
requirement of paragraph
(b)(3)(iii)(A)(2) of this section.
Accordingly, assuming all other
requirements of this section are
satisfied, BD’s purchase price of the
machine qualifies for the additional first
year depreciation deduction under this
section.
(LL) Example 38. (1) In June 2018, CA,
an individual, bought and placed in
service a new machine from an
unrelated party for use in his trade or
business. In a series of related
transactions, CA sells the machine to CB
and CB places it in service on
September 1, 2019, CB transfers the
machine to CC in a transaction
described in paragraph (g)(1)(iii) of this
section and CC places it in service on
November 1, 2019, and CC sells the

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machine to CD and CD places it in
service on January 2, 2020. CA and CB
are not related parties within the
meaning of section 179(d)(2)(A) and
§ 1.179–4(c)(1)(ii). CB and CC are related
parties within the meaning of section
179(d)(2)(B) and § 1.179–4(c)(1)(iii). CB
and CD are related parties within the
meaning of section 179(d)(2)(A) and
§ 1.179–4(c)(1)(ii), or section
179(d)(2)(B) and § 1.179–4(c)(1)(iii). CC
and CD are not related parties within
the meaning of section 179(d)(2)(A) and
§ 1.179–4(c)(1)(ii), or section
179(d)(2)(B) and § 1.179–4(c)(1)(iii). CA
is not related to CC or to CD within the
meaning of section 179(d)(2)(A) and
§ 1.179–4(c)(1)(ii). All parties are
calendar-year taxpayers.
(2) CA’s purchase of the machine in
June 2018 satisfies the original use
requirement of paragraph (b)(3)(ii) of
this section and, assuming all other
requirements of this section are met,
CA’s purchase price of the machine
qualifies for the additional first year
depreciation deduction under this
section.
(3) Pursuant to paragraph
(b)(3)(iii)(C)(1) of this section, a
transferee tests its relationship with the
transferor from which the transferee
directly acquires the depreciable
property, and with the original
transferor of the depreciable property in
the series. The relationship is tested
when the transferee acquires, and
immediately before the first transfer of,
the depreciable property in the series.
However, because CB placed in service
and transferred the machine in the same
taxable year in a transaction described
in paragraph (g)(1)(iii) of this section,
the section 168(i)(7) transaction between
CB and CC is disregarded pursuant to
paragraph (b)(3)(iii)(C)(2)(iii) of this
section. As a result, the following
relationships are tested under section
179(d)(2)(A) and (B): CB tests its
relationship to CA as of September 1,
2019; and CD tests its relationship to
CB, CC, and CA as of January 2, 2020,
and September 1, 2019.
(4) Because CA is not related to CB
within the meaning of section
179(d)(2)(A) and § 1.179–4(c)(1)(ii) as of
September 1, 2019, CB’s acquisition of
the machine satisfies the used property
acquisition requirement of paragraph
(b)(3)(iii)(A)(2) of this section.
Accordingly, assuming all other
requirements of this section are
satisfied, CB’s purchase price of the
machine qualifies for the additional first
year depreciation deduction under this
section. Pursuant to paragraph (g)(1)(iii)
of this section, CB is allocated 2/12 of
its 100-percent additional first year
depreciation deduction for the machine,

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and CC is allocated the remaining
portion of CB’s 100-percent additional
first year depreciation deduction for the
machine.
(5) CC is not related to CD and CA is
not related to CD within the meaning of
section 179(d)(2)(A) and § 1.179–
4(c)(1)(ii), or section 179(d)(2)(B) and
§ 1.179–4(c)(1)(iii) as of January 2, 2020,
or September 1, 2019. However, CB and
CD are related parties within the
meaning of section 179(d)(2)(A) and
§ 1.179–4(c)(1)(ii), or section
179(d)(2)(B) and § 1.179–4(c)(1)(iii) as of
January 2, 2020, or September 1, 2019.
Accordingly, CD’s acquisition of the
machine does not satisfy the used
property acquisition requirements of
paragraph (b)(3)(iii) of this section and
is not eligible for the additional first
year depreciation deduction.
(MM) Example 39. (1) In a series of
related transactions, on January 2, 2018,
DA, a corporation, bought and placed in
service a new machine from an
unrelated party for use in its trade or
business. As part of the same series, DB
purchases 100 percent of the stock of
DA on January 2, 2019, and such stock
acquisition meets the requirements of
section 1504(a)(2). DB and DA were not
related prior to the acquisition within
the meaning of section 179(d)(2)(A) and
§ 1.179–4(c)(1)(ii) or section 179(d)(2)(B)
and § 1.179–4(c)(1)(iii). Immediately
after acquiring the DA stock, and DB
liquidates DA under section 331. In the
liquidating distribution, DB receives the
machine that was acquired by DA on
January 2, 2018. As part of the same
series, on March 1, 2020, DB sells the
machine to DC and DC places it in
service. Throughout the series, DC is not
related to DB or DA within the meaning
of section 179(d)(2)(A) and § 1.179–
4(c)(1)(ii) or section 179(d)(2)(B) and
§ 1.179–4(c)(1)(iii).
(2) DA’s purchase of the machine on
January 2, 2018, satisfies the original
use requirement of paragraph (b)(3)(ii)
of this section and, assuming all other
requirements of this section are met,
DA’s purchase price of the machine
qualifies for the additional first year
depreciation deduction under this
section.
(3) Pursuant to paragraph
(b)(3)(iii)(C)(1) of this section, a
transferee tests its relationship with the
transferor from which the transferee
directly acquires the depreciable
property, and with the original
transferor of the depreciable property in
the series. The relationship is tested
when the transferee acquires, and
immediately before the first transfer of,
the depreciable property in the series.
Although DA is no longer in existence
as of the date DC acquires the machine,

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pursuant to paragraph (b)(3)(iii)(C)(2)(vi)
of this section, DA is deemed to be in
existence at the time of each transfer for
purposes of testing relationships under
paragraph (b)(3)(iii)(C)(1). As a result,
the following relationships are tested
under section 179(d)(2)(A) and (B): DB
tests its relationship to DA as of January
2, 2019, and January 2, 2018; and DC
tests its relationship to DB and DA as of
March 1, 2020, and January 2, 2018.
(4) Because DB acquired the machine
in a series of related transactions in
which DB acquired stock, meeting the
requirements of section 1504(a)(2), of
DA followed by a liquidation of DA
under section 331, the relationship of
DB and DA created thereof is
disregarded for purposes of testing the
relationship pursuant to paragraph
(b)(3)(iii)(C)(2)(v) of this section.
Therefore, DA is not related to DB
within the meaning of section
179(d)(2)(A) and § 1.179–4(c)(1)(ii) or
section 179(d)(2)(B) and § 1.179–
4(c)(1)(iii) as of January 2, 2019, or
January 2, 2018, and DB’s acquisition of
the machine satisfies the used property
acquisition requirement of paragraph
(b)(3)(iii)(A)(2) of this section.
Accordingly, assuming all other
requirements of this section are
satisfied, DB’s depreciable basis of the
machine as a result of the liquidation of
DA qualifies for the additional first year
depreciation deduction under this
section.
(5) Because DC is not related to DB or
DA within the meaning of section
179(d)(2)(A) and § 1.179–4(c)(1)(ii) or
section 179(d)(2)(B) and § 1.179–
4(c)(1)(iii) as of March 1, 2020, or
January 2, 2018, DC ’s acquisition of the
machine satisfies the used property
acquisition requirements of paragraph
(b)(3)(iii)(A)(2) of this section.
Accordingly, assuming all other
requirements of this section are
satisfied, DC ’s purchase price of the
machine qualifies for the additional first
year depreciation deduction.
(NN) Example 40. (1) Pursuant to a
series of related transactions, on January
2, 2018, EA bought and placed in
service a new machine from an
unrelated party for use in its trade or
business. As part of the same series, EA
sells the machine to EB and EB places
it in service on January 2, 2019. As part
of the same series, EB sells the machine
to EC and EC places it in service on
January 2, 2020. Throughout the series,
EA is not related to EB or EC within the
meaning of section 179(d)(2)(B) and
§ 1.179–4(c)(1)(iii). EB and EC were
related parties within the meaning of
section 179(d)(2)(B) and § 1.179–
4(c)(1)(iii) until July 1, 2019, at which
time, they ceased to be related.

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(2) EA’s purchase of the machine on
January 2, 2018, satisfies the original
use requirement of paragraph (b)(3)(ii)
of this section and, assuming all other
requirements of this section are met,
EA’s purchase price of the machines
qualifies for the additional first year
depreciation deduction under this
section.
(3) Pursuant to paragraph
(b)(3)(iii)(C)(1) of this section, a
transferee tests its relationship with the
transferor from which the transferee
directly acquires the depreciable
property, and with the original
transferor of the depreciable property in
the series. The relationship is tested
when the transferee acquires, and
immediately before the first transfer of,
the depreciable property in the series.
As a result, the following relationships
are tested under section 179(d)(2)(A)
and (B): EB tests its relationship to EA
as of January 2, 2019, and January 2,
2018; and EC tests its relationship to EA
and EB as of January 2, 2020, and
January 2, 2018.
(4) Because EA is not related to EB
within the meaning of section
179(d)(2)(B) and § 1.179–4(c)(1)(iii) as of
January 2, 2019, or January 2, 2018, EB’s
acquisition of the machine satisfies the
used property acquisition requirement
of paragraph (b)(3)(iii)(A)(2) of this
section. Accordingly, assuming all other
requirements of this section are
satisfied, EB’s purchase price of the
machine qualifies for the additional first
year depreciation deduction under this
section.
(5) EC and EA are not related parties
within the meaning of section
179(d)(2)(B) and § 1.179–4(c)(1)(iii) as of
January 2, 2020, or January 2, 2018.
Within the meaning of section
179(d)(2)(B) and § 1.179–4(c)(1)(iii), EC
is not related to EB as of January 2,
2020; however, EC is related to EB as of
January 2, 2018. Accordingly, EC ’s
acquisition of the machine does not
satisfy the used property acquisition
requirement of paragraph (b)(3)(iii) of
this section and is not eligible for the
additional first year depreciation
deduction.
(OO) Example 41. (1) The facts are the
same as in Example 40 of paragraph
(b)(3)(vii)(NN)(1) of this section, except
that instead of selling to EC, EB sells the
machine to EE, and EE places in service
on January 2, 2020, and EE sells the
machine to EC and EC places in service
on January 2, 2021. EE was not in
existence until July 2019 and is not
related to EA or EB.
(2) EA’s purchase of the machine on
January 2, 2018, satisfies the original
use requirement of paragraph (b)(3)(ii)
of this section and, assuming all other

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requirements of this section are met,
EA’s purchase price of the machine
qualifies for the additional first year
depreciation deduction under this
section.
(3) Pursuant to paragraph
(b)(3)(iii)(C)(1) of this section, a
transferee tests its relationship with the
transferor from which the transferee
directly acquires the depreciable
property, and with the original
transferor of the depreciable property in
the series. The relationship is tested
when the transferee acquires, and
immediately before the first transfer of,
the depreciable property in the series.
However, because EE was not in
existence immediately prior to the first
transfer of the depreciable property in
the series, EC tests its relationship with
EB and EA pursuant to paragraph
(b)(3)(iii)(C)(2)(vii) of this section. As a
result, the following relationships are
tested under section 179(d)(2)(A) and
(B): EB tests its relationship to EA as of
January 2, 2019, and January 2, 2018; EE
tests its relationship to EA and EB as of
January 2, 2020, and January 2, 2018;
and EC tests its relationship to EA and
EB as of January 2, 2021, and January 2,
2018.
(4) Because EA is not related to EB
within the meaning of section
179(d)(2)(B) and § 1.179–4(c)(1)(iii) as of
January 2, 2019, or January 2, 2018, EB’s
acquisition of the machine satisfies the
used property acquisition requirement
of paragraph (b)(3)(iii)(A)(2) of this
section. Accordingly, assuming all other
requirements of this section are
satisfied, EB’s purchase price of the
machine qualifies for the additional first
year depreciation deduction under this
section.
(5) Because EE is not related to EA or
EB within the meaning of section
179(d)(2)(B) and § 1.179–4(c)(1)(iii) as of
January 2, 2020, or January 2, 2018, EE’s
acquisition of the machine satisfies the
used property acquisition requirement
of paragraph (b)(3)(iii)(A)(2) of this
section. Accordingly, assuming all other
requirements of this section are
satisfied, EE ’s purchase price of the
machine qualifies for the additional first
year depreciation deduction under this
section.
(6) Within the meaning of section
179(d)(2)(B) and § 1.179–4(c)(1)(iii), EC
is not related to EA as of January 2,
2021, or January 2, 2018; however, EC
is related to EB as of January 2, 2018.
Accordingly, EC ’s acquisition of the
machine does not satisfy the used
property acquisition requirement of
paragraph (b)(3)(iii) of this section and

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is not eligible for the additional first
year depreciation deduction.
*
*
*
*
*
(5) * * *
(ii) * * *
(A) * * * For determination of
acquisition date, see paragraph
(b)(5)(ii)(B) of this section for property
acquired pursuant to a written binding
contract, paragraph (b)(5)(iv) of this
section for self-constructed property,
and paragraph (b)(5)(v) of this section
for property not acquired pursuant to a
written binding contract.
*
*
*
*
*
(iii) * * *
(G) Acquisition of a trade or business
or an entity. A contract to acquire all or
substantially all of the assets of a trade
or business or to acquire an entity (for
example, a corporation, a partnership,
or a limited liability company) is
binding if it is enforceable under State
law against the parties to the contract.
The presence of a condition outside the
control of the parties, including, for
example, regulatory agency approval,
will not prevent the contract from being
a binding contract. Further, the fact that
insubstantial terms remain to be
negotiated by the parties to the contract,
or that customary conditions remain to
be satisfied, does not prevent the
contract from being a binding contract.
This paragraph (b)(5)(iii)(G) also applies
to a contract for the sale of the stock of
a corporation that is treated as an asset
sale as a result of an election under
section 338 or under section 336(e)
made for a disposition described in
§ 1.336–2(b)(1).
*
*
*
*
*
(v) Determination of acquisition date
for property not acquired pursuant to a
written binding contract. Except as
provided in paragraphs (b)(5)(iv), (vi),
and (vii) of this section, the acquisition
date of property that the taxpayer
acquires pursuant to a contract that does
not meet the definition of a written
binding contract in paragraph (b)(5)(iii)
of this section, is the date on which the
taxpayer paid, in the case of a cash basis
taxpayer, or incurred, in the case of an
accrual 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
and designing, securing financing,
exploring, or researching. The preceding
sentence also applies to property that is
manufactured, constructed, or produced
for the taxpayer by another person
under a written contract that does not
meet the definition of a binding contract
in paragraph (b)(5)(iii) of this section,
and that is entered into prior to the
manufacture, construction, or

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production of the property for use by
the taxpayer in its trade or business or
for its production of income. This
paragraph (b)(5)(v) does not apply to an
acquisition described in paragraph
(b)(5)(iii)(G) of this section.
*
*
*
*
*
(viii) * * * Unless the facts
specifically indicate otherwise, assume
that the parties are not related within
the meaning of section 179(d)(2)(A) or
(B) and § 1.179–4(c), paragraph (c) of
this section does not apply, and the
parties do not have predecessors:
*
*
*
*
*
(c) Election for components of larger
self-constructed property for which the
manufacture, construction, or
production begins before September 28,
2017—(1) In general. A taxpayer may
elect to treat any acquired or selfconstructed component, as described in
paragraph (c)(3) of this section, of the
larger self-constructed property, as
described in paragraph (c)(2) of this
section, as being eligible for the
additional first year depreciation
deduction under this section, assuming
all requirements of section 168(k) and
this section are met. The taxpayer may
make this election for one or more such
components.
(2) Eligible larger self-constructed
property—(i) In general. Solely for
purposes of this paragraph (c), a larger
self-constructed property is property
that is manufactured, constructed, or
produced by the taxpayer for its own
use in its trade or business or
production of income. Solely for
purposes of this paragraph (c), property
that is manufactured, constructed, or
produced for the taxpayer by another
person under a written binding contract,
as defined in paragraph (b)(5)(iii) of this
section, or under a written contract that
does not meet the definition of a
binding contract in paragraph (b)(5)(iii)
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
production of income is considered to
be manufactured, constructed, or
produced by the taxpayer. Except as
provided in paragraph (c)(2)(iv) of this
section, such larger self-constructed
property must be property—
(A) That is described in paragraph
(b)(2)(i)(A), (B), (C), or (D) of this
section. Solely for purposes of the
preceding sentence, the requirement
that property has to be acquired after
September 27, 2017, is disregarded;
(B) That meets the requirements
under paragraph (b) of this section,
determined without regard to the

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acquisition date requirement in
paragraph (b)(5) of this section; and
(C) For which the taxpayer begins the
manufacture, construction, or
production before September 28, 2017.
(ii) Residential rental property or
nonresidential real property. If the
taxpayer constructs, manufactures, or
produces residential rental property or
nonresidential real property, as defined
in section 168(e)(2), or an improvement
to such property, for use in its trade or
business or production of income, all
property that is constructed,
manufactured, or produced as part of
such residential rental property,
nonresidential real property, or
improvement, as applicable, and that is
described in paragraph (c)(2)(i)(A) of
this section is the larger self-constructed
property for purposes of applying the
rules in this paragraph (c).
(iii) Beginning of manufacturing,
construction, or production. Solely for
purposes of paragraph (c)(2)(i)(C) of this
section, the determination of when
manufacture, construction, or
production of the larger self-constructed
property begins is made in accordance
with the rules in paragraph (b)(5)(iv)(B)
of this section if the larger selfconstructed property is manufactured,
constructed, or produced by the
taxpayer for its own use in its trade or
business or production of income, or is
manufactured, constructed, or produced
for the taxpayer by another person
under a written binding contract, as
defined in paragraph (b)(5)(iii) 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
production of income. If the larger selfconstructed property is manufactured,
constructed, or produced for the
taxpayer by another person under a
written contract that does not meet the
definition of a binding contract in
paragraph (b)(5)(iii) 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 production of
income, the determination of when
manufacture, construction, or
production of the larger self-constructed
property begins is made in accordance
with the rules in paragraph (b)(5)(v) of
this section. If the taxpayer enters into
a written binding contract, as defined in
paragraph (b)(5)(iii) of this section,
before September 28, 2017, with another
person to manufacture, construct, or
produce the larger self-constructed
property and the manufacture,
construction, or production of this
property begins after September 27,
2017, as determined under paragraph

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(b)(5)(iv)(B) of this section, this
paragraph (c) does not apply. If the
taxpayer enters into a written contract
that does not meet the definition of a
binding contract in paragraph (b)(5)(iii)
of this section before September 28,
2017, with another person to
manufacture, construct, or produce the
larger self-constructed property and the
manufacture, construction, or
production of this property begins after
September 27, 2017, as determined
under paragraph (b)(5)(v) of this section,
this paragraph (c) does not apply.
(iv) Exception. This paragraph (c)
does not apply to any larger selfconstructed property that is included in
a class of property for which the
taxpayer made an election under section
168(k)(7) (formerly section
168(k)(2)(D)(iii)) not to deduct the
additional first year depreciation
deduction.
(3) Eligible components—(i) In
general. Solely for purposes of this
paragraph (c), a component of the larger
self-constructed property, as described
in paragraph (c)(2) of this section, must
be qualified property under section
168(k)(2) and paragraph (b) of this
section. Solely for purposes of the
preceding sentence, a component will
satisfy the acquisition date requirement
in paragraph (b)(5) of this section if it
satisfies the requirements in paragraph
(c)(3)(ii) or (iii) of this section, as
applicable.
(ii) Acquired components. If a
component of the larger self-constructed
property is acquired pursuant to a
written binding contract, as defined in
paragraph (b)(5)(iii) of this section, the
component must be acquired by the
taxpayer after September 27, 2017, as
determined under the rules in paragraph
(b)(5)(ii)(B) of this section. If a
component of the larger self-constructed
property is acquired pursuant to a
written contract that does not meet the
definition of a binding contract in
paragraph (b)(5)(iii) of this section, the
component must be acquired by the
taxpayer after September 27, 2017, as
determined under the rules in paragraph
(b)(5)(v) of this section.
(iii) Self-constructed components. The
manufacture, construction, or
production of a component of a larger
self-constructed property must begin
after September 27, 2017. The
determination of when manufacture,
construction, or production of the
component begins is made in
accordance with the rules in—
(A) Paragraph (b)(5)(iv)(B) of this
section if the component is
manufactured, constructed, or produced
by the taxpayer for its own use in its
trade or business or for its production of

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income, or is manufactured,
constructed, or produced for the
taxpayer by another person under a
written binding contract, as defined in
paragraph (b)(5)(iii) of this section, that
is entered into prior to the manufacture,
construction, or production of the
component for use by the taxpayer in its
trade or business or for its production of
income; or
(B) Paragraph (b)(5)(v) of this section
if the component is manufactured,
constructed, or produced for the
taxpayer by another person under a
written contract that does not meet the
definition of a binding contract in
paragraph (b)(5)(iii) of this section, that
is entered into prior to the manufacture,
construction, or production of the
component for use by the taxpayer in its
trade or business or for its production of
income.
(4) Special rules—(i) Installation
costs. If the taxpayer pays, in the case
of a cash basis taxpayer, or incurs, in the
case of an accrual basis taxpayer, costs,
including labor costs, to install a
component of the larger self-constructed
property, as described in paragraph
(c)(2) of this section, such costs are
eligible for the additional first year
depreciation under this section,
assuming all requirements are met, only
if the component being installed meets
the requirements in paragraph (c)(3) of
this section.
(ii) Property described in section
168(k)(2)(B). The rules in paragraph
(e)(1)(iii) of this section apply for
determining the unadjusted depreciable
basis, as defined in § 1.168(b)–1(a)(3), of
larger self-constructed property
described in paragraph (c)(2) of this
section and in section 168(k)(2)(B).
(5) Computation of additional first
year depreciation deduction—(i)
Election is made. Before determining
the allowable additional first year
depreciation deduction for the larger
self-constructed property, as described
in paragraph (c)(2) of this section, for
which the taxpayer makes the election
specified in this paragraph (c) for one or
more components of such property, the
taxpayer must determine the portion of
the unadjusted depreciable basis, as
defined in § 1.168(b)–1(a)(3), of the
larger self-constructed property,
including all components, attributable
to the component that meets the
requirements of paragraphs (c)(3) and
(c)(4)(i) of this section (component
basis). The additional first year
depreciation deduction for the
component basis is determined by
multiplying such component basis by
the applicable percentage for the placedin-service year of the larger selfconstructed property. The additional

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first year depreciation deduction, if any,
for the remaining unadjusted
depreciable basis of the larger selfconstructed property, as described in
paragraph (c)(2) of this section, is
determined under section 168(k), as in
effect on the day before the date of the
enactment of the Act, and section
168(k)(8). For purposes of this
paragraph (c), the remaining unadjusted
depreciable basis of the larger selfconstructed property is equal to the
unadjusted depreciable basis, as defined
in § 1.168(b)–1(a)(3), of the larger selfconstructed property, including all
components, reduced by the sum of the
component basis of the components for
which the taxpayer makes the election
specified in this paragraph (c).
(ii) Election is not made. If the
taxpayer does not make the election
specified in this paragraph (c), the
additional first year depreciation
deduction, if any, for the larger selfconstructed property, including all
components, is determined under
section 168(k), as in effect on the day
before the date of the enactment of the
Act, and section 168(k)(8).
(6) Time and manner for making
election—(i) Time for making election.
The election specified in this paragraph
(c) must be made by the due date,
including extensions, of the Federal tax
return for the taxable year in which the
taxpayer placed in service the larger
self-constructed property.
(ii) Manner of making election. The
election specified in this paragraph (c)
must be made by attaching a statement
to such return indicating that the
taxpayer is making the election
provided in this paragraph (c) and
whether the taxpayer is making the
election for all or some of the
components described in paragraph
(c)(3) of this section. The election is
made separately by each person owning
qualified property (for example, for each
member of a consolidated group by the
agent for the group (within the meaning
of § 1.1502–77(a) and (c)), by the
partnership (including a lower-tier
partnership), or by the S corporation).
(7) Revocation of election—(i) In
general. Except as provided in
paragraph (c)(7)(ii) of this section, the
election specified in this paragraph (c),
once made, may be revoked only by
filing a request for a private letter ruling
and obtaining the Commissioner of
Internal Revenue’s written consent to
revoke the election. The Commissioner
may grant a request to revoke the
election if the taxpayer acted reasonably
and in good faith, and the revocation
will not prejudice the interests of the
Government. See generally § 301.9100–
3 of this chapter. The election specified

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in this paragraph (c) may not be revoked
through a request under section 446(e)
to change the taxpayer’s method of
accounting.
(ii) Automatic 6-month extension. If a
taxpayer made the election specified in
this paragraph (c), an automatic
extension of 6 months from the due date
of the taxpayer’s Federal tax return,
excluding extensions, for the placed-inservice year of the larger selfconstructed property is granted to
revoke that election, provided the
taxpayer timely filed the taxpayer’s
Federal tax return for that placed-inservice year and, within this 6-month
extension period, the taxpayer, and all
taxpayers whose tax liability would be
affected by the election, file an amended
Federal tax return for the placed-inservice year in a manner that is
consistent with the revocation of the
election.
(8) Additional procedural guidance.
The IRS may publish procedural
guidance in the Internal Revenue
Bulletin (see § 601.601(d)(2)(ii)(b) of this
chapter) that provides alternative
procedures for complying with
paragraph (c)(6) or (c)(7)(i) of this
section.
(9) Examples. The application of this
paragraph (c) is illustrated by the
following examples. Unless the facts
specifically indicate otherwise, assume
that the larger self-constructed property
is described in paragraph (c)(2) of this
section, the components that are
acquired or self-constructed after
September 27, 2017, are described in
paragraph (c)(3) of this section, the
taxpayer is an accrual basis taxpayer,
and none of the costs paid or incurred
after September 27, 2017, are for the
installation of components that do not
meet the requirements of paragraph
(c)(3) of this section.
(i) Example 1. (A) BC, a calendar year
taxpayer, is engaged in a trade or
business described in section
163(j)(7)(A)(iv) and §§ 1.163(j)–
1(b)(15)(i) and 1.163(j)–
10(c)(3)(iii)(C)(3). In December 2015, BC
decided to construct an electric
generation power plant for its own use.
This plant is property described in
section 168(k)(2)(B) as in effect on the
day before the date of the enactment of
the Act. However, the turbine for the
plant had to be manufactured by
another person for BC. In January 2016,
BC entered into a written binding
contract with CD to acquire the turbine.
BC received the completed turbine in
August 2017 at which time BC incurred
the cost of the turbine. The cost of the
turbine is 11 percent of the total cost of
the electric generation power plant to be
constructed by BC. BC began

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constructing the electric generation
power plant in October 2017 and placed
in service this new power plant,
including all component parts, in 2020.
(B) The larger self-constructed
property is the electric generation power
plant to be constructed by BC. For
determining if the construction of this
power plant begins before September
28, 2017, paragraph (b)(5)(iv)(B) of this
section provides that manufacture,
construction, or production of property
begins when physical work of a
significant nature begins. BC uses the
safe harbor test in paragraph
(b)(5)(iv)(B)(2) of this section 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 percent of the
total cost of the electric generation
power plant, physical work of a
significant nature for this plant began
before September 28, 2017.
(C) The power plant is described in
section 168(k)(9)(A) and paragraph
(b)(2)(ii)(F) of this section and,
therefore, is not larger self-constructed
property eligible for the election
pursuant to paragraph (c)(2)(i)(B) of this
section. Accordingly, none of BC’s
expenditures for components of the
power plant that are acquired or selfconstructed after September 27, 2017,
are eligible for the election specified in
this paragraph (c). Assuming all
requirements are met under section
168(k)(2) as in effect on the day before
the date of the enactment of the Act, the
unadjusted depreciable basis of the
power plant, including all components,
attributable to its construction before
January 1, 2020, is eligible for the 30percent additional first year
depreciation deduction pursuant to
section 168(k)(8).
(ii) Example 2. (A) In August 2017,
BD, a calendar-year taxpayer, entered
into a written binding contract with CE
for CE to manufacture a locomotive for
BD for use in its trade or business.
Before September 28, 2017, BD acquired
or self-constructed components of the
locomotive. These components cost
$500,000, which is more than 10
percent of the total cost of the
locomotive, and BD incurred such costs
before September 28, 2017. After
September 27, 2017, BD acquired or
self-constructed components of the
locomotive and these components cost
$4,000,000. In February 2019, CE
delivered the locomotive to BD and BD
placed in service the locomotive. The
total cost of the locomotive is
$4,500,000. The locomotive is property
described in section 168(k)(2)(B) as in
effect on the day before the date of the

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enactment of the Act. On its timely filed
Federal income tax return for 2019, BD
made the election specified in this
paragraph (c).
(B) The larger self-constructed
property is the locomotive being
manufactured by CE for BD. For
determining if the manufacturing of this
locomotive begins before September 28,
2017, paragraph (b)(5)(iv)(B) of this
section provides that manufacture,
construction, or production of property
begins when physical work of a
significant nature begins. BD uses the
safe harbor test in paragraph
(b)(5)(iv)(B)(2) of this section to
determine when physical work of a
significant nature begins for the
locomotive. Because BD had incurred
more than 10 percent of the total cost of
the locomotive before September 28,
2017, physical work of a significant
nature for this locomotive began before
September 28, 2017.
(C) Because BD made the election
specified in this paragraph (c), the cost
of $4,000,000 for the locomotive’s
components acquired or selfconstructed after September 27, 2017,
qualifies for the 100-percent additional
first year depreciation deduction under
this section, assuming all other
requirements are met. The remaining
cost of the locomotive is $500,000 and
such amount qualifies for the 40-percent
additional first year depreciation
deduction pursuant to section 168(k)(8),
assuming all other requirements in
section 168(k) as in effect on the day
before the date of the enactment of the
Act are met.
(iii) Example 3. (A) In February 2016,
BF, a calendar-year taxpayer, entered
into a written binding contract with CG
for CG to manufacture a vessel for BF for
use in its trade or business. Before
September 28, 2017, BF acquired or selfconstructed components for the vessel.
These components cost $30,000,000,
which is more than 10 percent of the
total cost of the vessel, and BF incurred
such costs before September 28, 2017.
After September 27, 2017, BF acquired
or self-constructed components for the
vessel and these components cost
$15,000,000. In February 2021, CG
delivered the vessel to BF and BF placed
in service the vessel. The vessel is
property described in section
168(k)(2)(B) as in effect on the day
before the date of the enactment of the
Act. The total cost of the vessel is
$45,000,000. On its timely filed Federal
income tax return for 2021, BF made the
election specified in this paragraph (c).
(B) The larger self-constructed
property is the vessel being
manufactured by CG for BF. For
determining if the manufacturing of this

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vessel begins before September 28,
2017, paragraph (b)(5)(iv)(B) of this
section provides that manufacture,
construction, or production of property
begins when physical work of a
significant nature begins. BF uses the
safe harbor test in paragraph
(b)(5)(iv)(B)(2) of this section to
determine when physical work of a
significant nature begins for the vessel.
Because BF had incurred more than 10
percent of the total cost of the vessel
before September 28, 2017, physical
work of a significant nature for this
vessel began before September 28, 2017.
(C) Because BF made the election
specified in this paragraph (c), the cost
of $15,000,000 for the vessel’s
components acquired or selfconstructed after September 27, 2017,
qualifies for the 100-percent additional
first year depreciation deduction under
this section, assuming all other
requirements are met. Pursuant to
section 168(k)(8) and because BF placed
in service the vessel after 2020, none of
the remaining cost of the vessel is
eligible for any additional first year
depreciation deduction under section
168(k) and this section nor under
section 168(k) as in effect on the day
before the date of the enactment of the
Act.
(iv) Example 4. (A) In March 2017,
BG, a calendar year taxpayer, entered
into a written contract with CH for CH
to construct a building for BG to use in
its retail business. This written contract
does not meet the definition of a
binding contract in paragraph (b)(5)(iii)
of this section. In September 2019, the
construction of the building was
completed and placed in service by BG.
The total cost is $10,000,000. Of this
amount, $3,000,000 is the total cost for
all section 1245 properties constructed
as part of the building, and $7,000,000
is for the building. Under section 168(e),
section 1245 properties in the total
amount of $2,400,000 are 5-year
property and in the total amount of
$600,000 are 7-year property. The
building is nonresidential real property
under section 168(e). Before September
28, 2017, BG acquired or selfconstructed certain components and the
total cost of these components is
$500,000 for the section 1245 properties
and $3,000,000 for the building. BG
incurred these costs before September
28, 2017. After September 27, 2017, BG
acquired or self-constructed the
remaining components of the section
1245 properties and these components
cost $2,500,000. BG incurred these costs
of $2,500,000 after September 27, 2017.
On its timely filed Federal income tax
return for 2019, BG made the election
specified in this paragraph (c).

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(B) All section 1245 properties are
constructed as part of the construction
of the building and are described in
paragraph (b)(2)(i)(A) of this section.
The building is not described in
paragraph (b)(2)(i)(A), (B), (C), or (D) of
this section. As a result, under
paragraph (c)(2)(ii) of this section, the
larger self-constructed property is all
section 1245 properties with a total cost
of $3,000,000. For determining if the
construction of these section 1245
properties begins before September 28,
2017, paragraph (b)(5)(v) of this section
provides that manufacture,
construction, or production of property
begins when the taxpayer incurs more
than 10 percent of the total cost of the
property. Because BG incurred more
than 10 percent of the total cost of the
section 1245 properties before
September 28, 2017, construction of the
section 1245 properties began before
September 28, 2017.
(C) Because BG made the election
specified in this paragraph (c), the cost
of $2,500,000 for the section 1245
components acquired or selfconstructed by BG after September 27,
2017, qualifies for the 100-percent
additional first year depreciation
deduction under this section, assuming
all other requirements are met. The
remaining cost of the section 1245
components is $500,000 and such
amount qualifies for the 30-percent
additional first year depreciation
deduction pursuant to section 168(k)(8),
assuming all other requirements in
section 168(k), as in effect on the day
before the date of the enactment of the
Act, are met. Because the building is not
qualified property under section 168(k),
as in effect on the day before the date
of the enactment of the Act, none of the
cost of $7,000,000 for the building is
eligible for any additional first year
depreciation deduction under section
168(k) and this section or under section
168(k), as in effect on the day before the
date of the enactment of the Act.
(d) * * *
(3) * * *
(iv) Determination of acquisition date
for property not acquired pursuant to a
written binding contract. For purposes
of the acquisition rules in paragraph
(d)(1) of this section, the following
property is acquired by the taxpayer
before January 1, 2027, if the taxpayer
paid, in the case of a cash basis
taxpayer, or incurred, in the case of an
accrual basis taxpayer, more than 10
percent of the total cost of the property
before January 1, 2027, excluding the
cost of any land and preliminary
activities such as planning and
designing, securing financing,
exploring, or researching:

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(A) Property that the taxpayer
acquires pursuant to a contract that does
not meet the definition of a written
binding contract in paragraph (b)(5)(iii)
of this section; or
(B) Property that is manufactured,
constructed, or produced for the
taxpayer by another person under a
written contract that does not meet the
definition of a binding contract in
paragraph (b)(5)(iii) of this section, and
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
production of income.
*
*
*
*
*
(e) * * *
(1) * * *
(iii) * * * The amounts of unadjusted
depreciable basis attributable to the
property’s manufacture, construction, or
production before January 1, 2027, are
referred to as ‘‘progress expenditures.’’
Rules similar to the rules in section
4.02(1)(b) of Notice 2007–36 (2007–17
I.R.B. 1000) (see § 601.601(d)(2)(ii)(b) of
this chapter) apply for determining
progress expenditures, regardless of
whether the property is manufactured,
constructed, or produced for the
taxpayer by another person under a
written binding contract, as defined in
paragraph (b)(5)(iii) of this section, or
under a written contract that does not
meet the definition of a binding contract
in paragraph (b)(5)(iii) of this section.
The IRS may publish procedural
guidance in the Internal Revenue
Bulletin (see § 601.601(d)(2)(ii)(b) of this
chapter) that provides alternative
procedures for complying with this
paragraph (e)(1)(iii).
*
*
*
*
*
(f) * * *
(7) Additional procedural guidance.
The IRS may publish procedural
guidance in the Internal Revenue
Bulletin (see § 601.601(d)(2)(ii)(b) of this
chapter) that provides alternative
procedures for complying with
paragraph (f)(1)(iii), (f)(1)(iv), (f)(2)(ii),
(f)(2)(iii), (f)(3)(ii), (f)(3)(iii), or (f)(5)(i) of
this section.
(g) * * *
(11) Mid-quarter convention. In
determining whether the mid-quarter
convention applies for a taxable year
under section 168(d)(3) and § 1.168(d)–
1, the depreciable basis, as defined in
§ 1.168(d)–1(b)(4), for the taxable year
the qualified property is placed in
service by the taxpayer is not reduced
by the allowed or allowable additional
first year depreciation deduction for that
taxable year. See § 1.168(d)–1(b)(4).
(h) * * *

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(1) In general. Except as provided in
paragraphs (h)(2) and (3) of this section,
this section applies to—
(i) Depreciable property acquired after
September 27, 2017, by the taxpayer and
placed in service by the taxpayer during
or after the taxpayer’s taxable year that
begins on or after January 1, 2021;
(ii) A specified plant for which the
taxpayer properly made an election to
apply section 168(k)(5) and that is
planted, or grafted to a plant that was
previously planted, by the taxpayer
during or after the taxpayer’s taxable
year that begins on or after January 1,
2021; and
(iii) Components acquired or selfconstructed after September 27, 2017, of
larger self-constructed property
described in paragraph (c)(2) of this
section and placed in service by the
taxpayer during or after the taxpayer’s
taxable year that begins on or after
January 1, 2021.
(2) Applicability of this section for
prior taxable years. For taxable years
beginning before January 1, 2021, see
§ 1.168(k)-2 as contained in 26 CFR part
1, revised as of April 1, 2020.
(3) Early application of this section
and § 1.1502–68—(i) In general. Subject
to paragraphs (h)(3)(ii) and (iii) of this
section, and provided that all members
of a consolidated group consistently
apply the same set of rules, a taxpayer
may choose to apply both the rules of
this section and the rules of § 1.1502–68
(to the extent relevant), in their entirety
and in a consistent manner, to—
(A) Depreciable property acquired
after September 27, 2017, by the
taxpayer and placed in service by the
taxpayer during a taxable year ending
on or after September 28, 2017;
(B) A specified plant for which the
taxpayer properly made an election to
apply section 168(k)(5) and that is
planted, or grafted to a plant that was
previously planted, after September 27,
2017, by the taxpayer during a taxable
year ending on or after September 28,
2017; and
(C) Components acquired or selfconstructed after September 27, 2017, of
larger self-constructed property
described in paragraph (c)(2) of this
section and placed in service by the
taxpayer during a taxable year ending
on or after September 28, 2017.
(ii) Early application to certain
transactions. In the case of property
described in § 1.1502–68(e)(2)(i) that is
acquired in a transaction that satisfies
the requirements of § 1.1502–68(c)(1)(ii)
or (c)(2)(ii), the taxpayer may apply the
rules of this section and the rules of
§ 1.1502–68 (to the extent relevant), in
their entirety and in a consistent
manner, to such property only if those

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Federal Register / Vol. 85, No. 218 / Tuesday, November 10, 2020 / Rules and Regulations
rules are applied, in their entirety and
in a consistent manner, by all parties to
the transaction, including the transferor
member, the transferee member, and the
target, as applicable, and the
consolidated groups of which they are
members, for the taxable year(s) in
which the transaction occurs and the
taxable year(s) that includes the day
after the deconsolidation date, as
defined in § 1.1502–68(a)(2)(iii).
(iii) Bound by early application. Once
a taxpayer applies the rules of this
section and the rules of § 1.1502–68 (to
the extent relevant), in their entirety, for
a taxable year, the taxpayer must
continue to apply the rules of this
section and the rules of § 1.1502–68 (to
the extent relevant), in their entirety, for
the taxpayer’s subsequent taxable years.
■ Par. 5. Section 1.1502–68 is added
immediately following § 1.1502–59A to
read as follows:

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§ 1.1502–68 Additional first year
depreciation deduction for property
acquired and placed in service after
September 27, 2017.

(a) In general—(1) Overview. This
section provides rules governing the
availability of the additional first year
depreciation deduction allowable under
section 168(k) for qualified property that
is acquired and placed in service after
September 27, 2017, by a member of a
consolidated group. Except as otherwise
provided in paragraph (c) of this
section, the rules in § 1.168(k)–2 apply
to members of a consolidated group in
addition to the rules in this section.
Paragraph (a)(2) of this section provides
definitions of terms used in this section.
Paragraph (b) of this section provides
rules addressing the application of
§ 1.168(k)–2(b)(3)(iii)(A)(1) (requiring
that a taxpayer claiming the additional
first year depreciation deduction for
used property not previously have used
the property) to members of a
consolidated group. Paragraph (c) of this
section provides rules addressing
certain transfers of eligible property (as
defined in paragraph (a)(2)(vii) of this
section) between members of a
consolidated group if the transferee
member (as defined in paragraph
(a)(2)(xii) of this section) leaves the
group pursuant to the same series of
related transactions. Paragraph (d) of
this section provides examples
illustrating the application of the rules
of this section. Paragraph (e) of this
section provides the applicability dates.
(2) Definitions. The following
definitions apply for purposes of this
section.
(i) Consolidated Asset Acquisition
Rule. The term Consolidated Asset
Acquisition Rule refers to the rule set

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forth in paragraph (c)(1)(i) of this
section addressing certain intercompany
transfers of eligible property.
(ii) Consolidated Deemed Acquisition
Rule. The term Consolidated Deemed
Acquisition Rule refers to the rule set
forth in paragraph (c)(2)(i) of this
section addressing certain intercompany
transfers of the stock of target (as
defined in paragraph (a)(2)(xi) of this
section).
(iii) Deconsolidation date. The term
deconsolidation date means the date on
which a transferee member ceases to be
a member of a consolidated group.
(iv) Designated transaction. The term
designated transaction has the meaning
provided in paragraph (c)(4)(i) of this
section.
(v) Deemed replacement property.
The term deemed replacement property
means used property that is identical to
(but is separate and distinct from) the
eligible property that the transferee
member or target is deemed to sell to an
unrelated party under the Consolidated
Asset Acquisition Rule or the
Consolidated Deemed Acquisition Rule.
For all Federal income tax purposes, the
deemed purchase of deemed
replacement property by the transferee
member or target under paragraph
(c)(1)(i)(B) or (c)(2)(i)(B) of this section,
respectively, does not result in the basis
in such property being determined, in
whole or in part, by reference to the
basis of other property held at any time
by the transferee member or target. See
section 179(d)(3) and § 1.168(k)–
2(b)(3)(iii)(A)(3).
(vi) Deemed sale amount. The term
deemed sale amount means an amount
equal to the transferee member’s or the
target’s adjusted basis in the eligible
property immediately before the
transferee member or target is deemed to
sell the property to an unrelated party
under the Consolidated Asset
Acquisition Rule or the Consolidated
Deemed Acquisition Rule.
(vii) Eligible property. The term
eligible property means depreciable
property (as defined in § 1.168(b)–
1(a)(1)) that meets the requirements in
§ 1.168(k)–2(b)(2), determined without
regard to § 1.168(k)–2(b)(2)(ii)(C)
(property subject to an election not to
claim the additional first year
depreciation for a class of property)
except on the day after the
deconsolidation date.
(viii) Group Prior Use Rule. The term
Group Prior Use Rule refers to the rule
set forth in paragraph (b)(1) of this
section addressing when a member of a
consolidated group is attributed another
member’s depreciable interest in
property.

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71765

(ix) Lookback Period. The term
lookback period means, with respect to
a member of a consolidated group, the
period that includes the five calendar
years immediately prior to the current
calendar year in which the property is
placed in service by such member, as
well as the portion of such current
calendar year before the date on which
the member placed the property in
service (without taking into account the
applicable convention).
(x) Stock and Asset Acquisition Rule.
The term Stock and Asset Acquisition
Rule refers to the rule set forth in
paragraph (b)(2) of this section
addressing when a member of a
consolidated group is attributed a new
member’s depreciable interest in
property.
(xi) Target. The term target means the
member whose stock is transferred in a
transaction that is subject to the
Consolidated Deemed Acquisition Rule.
(xii) Transferee member. The term
transferee member means the member
that acquires eligible property or target
stock, respectively, in a transaction that
is subject to the Consolidated Asset
Acquisition Rule or the Consolidated
Deemed Acquisition Rule.
(xiii) Transferor member. The term
transferor member means the member
that transfers eligible property or target
stock, respectively, in a transaction that
is subject to the Consolidated Asset
Acquisition Rule or the Consolidated
Deemed Acquisition Rule.
(b) Acquisitions of depreciable
property by a member of a consolidated
group—(1) General rule (Group Prior
Use Rule). Solely for purposes of
applying § 1.168(k)–2(b)(3)(iii)(A)(1), if a
member of a consolidated group
acquires depreciable property in which
the group had a depreciable interest at
any time within the lookback period,
the member is treated as having a
depreciable interest in the property
prior to the acquisition. For purposes of
this paragraph (b)(1), a consolidated
group is treated as having a depreciable
interest in property during the time any
current or previous member of the group
had a depreciable interest in the
property while a member of the group.
For special rules that apply when a
member of a consolidated group
acquires depreciable property in an
intercompany transaction (as defined in
§ 1.1502–13(b)(1)(i)) and then leaves the
group pursuant to the same series of
related transactions, see paragraph (c) of
this section.
(2) Certain acquisitions pursuant to a
series of related transactions (Stock and
Asset Acquisition Rule). Solely for
purposes of applying § 1.168(k)–
2(b)(3)(iii)(A)(1), if a series of related

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Federal Register / Vol. 85, No. 218 / Tuesday, November 10, 2020 / Rules and Regulations

transactions includes one or more
transactions in which property is
acquired by a member of a consolidated
group, and one or more transactions in
which a corporation that had a
depreciable interest in the property
(determined without regard to the
application of the Group Prior Use Rule)
within the lookback period becomes a
member of the group, then the member
that acquires the property is treated as
having a depreciable interest in the
property prior to the acquisition.
(c) Certain intercompany transfers of
eligible property followed by
deconsolidation—(1) Acquisition of
eligible property by a member that
leaves the group—(i) General rule
(Consolidated Asset Acquisition Rule).
This paragraph (c)(1) applies to certain
transactions pursuant to which one
member of a consolidated group
(transferee member) acquires from
another member of the same
consolidated group (transferor member)
eligible property. Except as otherwise
provided in paragraph (c)(3) or (4) of
this section, if a transaction satisfies the
requirements of paragraph (c)(1)(ii) of
this section, then § 1.168(k)–
2(b)(3)(iii)(C) (providing special rules
when depreciable property is acquired
as part of a series of related transactions)
does not apply to the transaction, and
for all Federal income tax purposes—
(A) The transferee member is treated
as selling the eligible property to an
unrelated person on the day after the
deconsolidation date in exchange for an
amount of cash equal to the deemed sale
amount; and
(B) Immediately after the deemed sale
in paragraph (c)(1)(i)(A) of this section,
the transferee member is treated as
purchasing deemed replacement
property from an unrelated person for
an amount of cash equal to the deemed
sale amount.
(ii) Requirements. A transaction
satisfies the requirements of this
paragraph (c)(1)(ii) if—
(A) The transferee member’s
acquisition of the eligible property
meets the requirements of § 1.168(k)–
2(b)(3)(iii)(A) without regard to section
179(d)(2)(A) or (B) and § 1.179–
4(c)(1)(ii) or (iii) or the Group Prior Use
Rule;
(B) As part of the same series of
related transactions that includes the
acquisition, the transferee member
ceases to be a member of the
consolidated group and ceases to be
related, within the meaning of section
179(d)(2)(A) or (B) and § 1.179–
4(c)(1)(ii) or (iii), to the transferor
member; and
(C) The acquired eligible property
continues to be eligible property on the

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deconsolidation date and the day after
the deconsolidation date.
(2) Deemed acquisition of eligible
property pursuant to an election under
section 338 or 336(e) by a member that
leaves the group—(i) General rule
(Consolidated Deemed Acquisition
Rule). This paragraph (c)(2) applies to
certain transactions pursuant to which a
transferee member acquires from a
transferor member the stock of another
member of the same consolidated group
that holds eligible property (target) in
either a qualified stock purchase for
which a section 338 election is made or
a qualified stock disposition described
in § 1.336–2(b)(1) for which a section
336(e) election is made. Except as
otherwise provided in paragraph (c)(3)
or (4) of this section, if a transaction
satisfies the requirements of paragraph
(c)(2)(ii) of this section, then § 1.168(k)–
2(b)(3)(iii)(C) does not apply to the
transaction, and for all Federal income
tax purposes—
(A) The target is treated as selling the
eligible property to an unrelated person
on the day after the deconsolidation
date in exchange for an amount of cash
equal to the deemed sale amount; and
(B) Immediately after the deemed sale
in paragraph (c)(2)(i)(A) of this section,
the target is treated as purchasing
deemed replacement property from an
unrelated person for an amount of cash
equal to the deemed sale amount.
(ii) Requirements. A transaction
satisfies the requirements of this
paragraph (c)(2)(ii) if:
(A) The target’s acquisition of the
eligible property meets the requirements
of § 1.168(k)–2(b)(3)(iii)(A) without
regard to the Group Prior Use Rule;
(B) As part of the same series of
related transactions that includes the
qualified stock purchase or qualified
stock disposition, the transferee member
and the target cease to be members of
the transferor member’s consolidated
group and cease to be related, within the
meaning of section 179(d)(2)(A) or (B)
and § 1.179–4(c)(1)(ii) or (iii), to the
transferor member; and
(C) The target’s eligible property on
the acquisition date (within the meaning
of § 1.338–2(c)(1)) or the disposition
date (within the meaning of § 1.336–
1(b)(8)) continues to be eligible property
on the deconsolidation date and the day
after the deconsolidation date.
(3) Disposition of depreciable
property pursuant to the same series of
related transactions. Paragraph (c)(1) of
this section does not apply if, following
the acquisition of eligible property, the
transferee member disposes of such
property pursuant to the same series of
related transactions that includes the
property acquisition. Paragraph (c)(2) of

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this section does not apply if, following
the deemed acquisition of eligible
property, the target disposes of such
property pursuant to the same series of
related transactions that includes the
qualified stock purchase or qualified
stock disposition. See § 1.168(k)–
2(b)(3)(iii)(C) for rules regarding the
transfer of property in a series of related
transactions. See also § 1.168(k)–2(g)(1)
for rules regarding property placed in
service and disposed of in the same
taxable year. For purposes of this
paragraph (c)(3), the deemed sale of
eligible property by the transferee
member or the target pursuant to
paragraph (c)(1)(i)(A) or (c)(2)(i)(A) of
this section is not treated as a
‘‘disposition’’ of such property.
(4) Election to not apply paragraph
(c)(1)(i) or (c)(2)(i) of this section—(i) In
general. If a transaction satisfies the
requirements of the Consolidated Asset
Acquisition Rule or the Consolidated
Deemed Acquisition Rule in paragraph
(c)(1)(ii) or (c)(2)(ii) of this section,
respectively, the transferee member or
the target nonetheless may elect not to
apply the Consolidated Asset
Acquisition Rule or the Consolidated
Deemed Acquisition Rule, respectively,
to all eligible property that is acquired
or deemed acquired in such transaction.
If a transferee member or target makes
an election under this paragraph (c)(4)
with respect to any transaction
(designated transaction), then—
(A) The transferee member or target is
deemed to have made such an election
for all other transactions—
(1) That satisfy the requirements of
the Consolidated Asset Acquisition Rule
or the Consolidated Deemed Acquisition
Rule;
(2) That are part of the same series of
related transactions as the designated
transaction; and
(3) In which the transferee member or
target either is the same transferee
member or target as in the designated
transaction or is related, within the
meaning of section 179(d)(2)(A) or (B)
and § 1.179–4(c)(1)(ii) or (iii), to the
transferee member or target in the
designated transaction immediately
after the end of the series of related
transactions; and
(B) Any eligible property acquired or
deemed acquired in the designated
transaction and in any transactions
described in paragraph (c)(4)(i)(A) of
this section does not satisfy either the
original use requirement or the used
property acquisition requirements in
§ 1.168(k)–2(b)(3) and, thus, is not
‘‘qualified property’’ within the
meaning of § 1.168(k)–2(b)(1).
(ii) Time and manner for making
election—(A) Time to make election. An

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Federal Register / Vol. 85, No. 218 / Tuesday, November 10, 2020 / Rules and Regulations
election under this paragraph (c)(4)
must be made by the due date,
including extensions, for the Federal tax
return for the taxable year of the
transferee member or target that begins
on the day after the deconsolidation
date.
(B) Manner of making election. A
transferee member or target, as
applicable, makes the election under
this paragraph (c)(4) by attaching a
statement to its return for the taxable
year that begins on the day after the
deconsolidation date. The statement
must describe the transaction(s) to
which the Consolidated Asset
Acquisition Rule or Consolidated
Deemed Acquisition Rule otherwise
would apply and state that the
transferee member or the target, as
applicable, is not claiming the
additional first year depreciation
deduction for any eligible property
transferred in such transaction(s). If, at
the time the election is made, the
transferee member or the target is a
member of a consolidated group, the
statement is made by the agent for the
group (within the meaning of § 1.1502–
77(a) and (c)) on behalf of the transferee
member or the target and is attached to
the consolidated return of the group for
the taxable year of the group that
includes the taxable year of the
transferee member or target that begins
on the day after the deconsolidation
date.
(C) Additional procedural guidance.
The IRS may publish procedural
guidance in the Internal Revenue
Bulletin (see § 601.601(d)(2)(ii)(b) of this
chapter) that provides alternative
procedures for complying with
paragraph (c)(4)(ii)(A) or (B) of this
section.
(iii) Revocation of election. An
election specified in this paragraph
(c)(4), once made, may be revoked only
by filing a request for a private letter
ruling and obtaining the Commissioner
of Internal Revenue’s written consent to
revoke the election. The Commissioner
may grant a request to revoke the
election if the taxpayer acted reasonably
and in good faith, and the revocation
will not prejudice the interests of the
Government. See generally § 301.9100–
3 of this chapter. An election specified
in this paragraph (c)(4) may not be
revoked through a request under section
446(e) to change the taxpayer’s method
of accounting.
(d) Examples. For purposes of the
examples in this section, unless
otherwise stated: Parent, S, B,
Controlled, and T are members of a
consolidated group of which Parent is
the common parent (Parent group);
Parent owns all of the only class of stock

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of each of S, B, Controlled, and T; X is
the common parent of the X
consolidated group (X group); no
member of the X group is related, within
the meaning of section 179(d)(2)(A) or
(B) and § 1.179–4(c)(1)(ii) or (iii)
(Related), to any member of the Parent
group; G and U are corporations that are
not Related to each other or to any
member of the Parent group or the X
group; the Equipment in each example
is eligible property; no member of the
Parent group or the X group has had a
depreciable interest in the Equipment
within the lookback period; § 1.168(k)–
2(b)(3)(iii)(A)(1) is referred to as the No
Prior Use Requirement; and § 1.168(k)–
2(b)(3)(iii)(A)(2) is referred to as the
Unrelated Party Requirement. The rules
of this section are illustrated by the
following examples.
(1) Example 1: Intercompany sale of
eligible property—(i) Facts. S has a
depreciable interest in Equipment #1. In
2018, S sells Equipment #1 to B, and B
places Equipment #1 in service in the
same year.
(ii) Analysis. B’s acquisition of
Equipment #1 does not satisfy either the
No Prior Use Requirement or the
Unrelated Party Requirement. Under the
Group Prior Use Rule, B is treated as
previously having a depreciable interest
in Equipment #1 because B (a member
of the Parent group) acquired
Equipment #1 and S, while a member of
the Parent group, had a depreciable
interest in Equipment #1 within the
lookback period. In addition, B acquires
Equipment #1 from S, and B and S are
Related at the time of the acquisition.
Accordingly, B is not eligible to claim
the additional first year depreciation
deduction for Equipment #1 in 2018.
(2) Example 2: Sale outside of the
consolidated group followed by a
reacquisition within the lookback
period—(i) Facts. S has a depreciable
interest in Equipment #2. In 2018, S
sells Equipment #2 to G. In 2019, in an
unrelated transaction, B acquires
Equipment #2 from G and places it in
service in the same year.
(ii) Analysis. B’s acquisition of
Equipment #2 does not satisfy the No
Prior Use Requirement as a result of the
Group Prior Use Rule. Pursuant to the
Group Prior Use Rule, B is treated as
previously having a depreciable interest
in Equipment #2 because B is a member
of the Parent group and S, while a
member of the Parent group, had a
depreciable interest in Equipment #2
within the lookback period. Thus, B is
not eligible to claim the additional first
year depreciation deduction for
Equipment #2 in 2019. The result would
be the same if, after selling Equipment
#2 to G, S had ceased to be a member

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of the Parent group prior to B’s
acquisition of Equipment #2.
(iii) Sale outside of the consolidated
group followed by a reacquisition
beyond the lookback period. The facts
are the same as in paragraph (d)(2)(i) of
this section, except that B acquires
Equipment #2 and places it in service in
2024 instead of 2019. B’s acquisition of
Equipment #2 satisfies the No Prior Use
Requirement. B would not be treated as
previously having a depreciable interest
in Equipment #2 under the Group Prior
Use Rule because the Parent group did
not have a depreciable interest in
Equipment #2 within the lookback
period. Further, B itself did not have a
prior depreciable interest in Equipment
#2 within the lookback period.
Assuming all other requirements in
§ 1.168(k)–2 are satisfied, B is eligible to
claim the additional first year
depreciation deduction for Equipment
#2 in 2024. The result would be the
same if S, rather than B, acquired and
placed in service Equipment #2 in 2024.
(3) Example 3: Acquisition of eligible
property by the consolidated group
followed by a corporation with a prior
depreciable interest joining the group as
part of the same series of related
transactions—(i) Facts. G has a
depreciable interest in Equipment #3.
During 2018, G sells Equipment #3 to U.
In a series of related transactions that
does not include the 2018 sale, Parent
acquires all of the stock of G in 2019.
Later in 2019, B purchases Equipment
#3 from U and places it in service
immediately thereafter.
(ii) Analysis. B’s acquisition of
Equipment #3 does not satisfy the No
Prior Use Requirement as a result of the
Stock and Asset Acquisition Rule. In a
series of related transactions, G became
a member of the Parent group and B
acquired Equipment #3. Because G had
a depreciable interest in Equipment #3
within the lookback period, B is treated
as having a depreciable interest in
Equipment #3 under the Stock and
Asset Acquisition Rule. Thus, B is not
eligible to claim the additional first year
depreciation deduction for Equipment
#3 in 2019.
(iii) B purchases Equipment #3 in
2024. The facts are the same as in
paragraph (d)(3)(i) of this section, except
that B acquires and places in service
Equipment #3 in 2024 instead of 2019.
B is not treated under the Stock and
Asset Acquisition Rule as having a prior
depreciable interest in Equipment #3
because G (which sold Equipment #3 to
U in 2018) did not have a depreciable
interest in Equipment #3 within the
lookback period. In addition, B is not
treated under the Group Prior Use Rule
as having a prior depreciable interest in

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Equipment #3 at the time of the
purchase because neither G nor any
other member of the Parent group had
a depreciable interest in Equipment #3
while a member of the Parent group
within the lookback period. Further, B
itself did not have a depreciable interest
in Equipment #3 within the lookback
period. Accordingly, B’s acquisition of
Equipment #3 satisfies the No Prior Use
Requirement. Assuming all other
requirements in § 1.168(k)–2 are
satisfied, B is eligible to claim the
additional first year depreciation
deduction for Equipment #3 in 2024.
(iv) No series of related transactions.
The facts are the same as in paragraph
(d)(3)(i) of this section, except that
Parent’s acquisition of the G stock and
B’s purchase of Equipment #3 are not
part of the same series of related
transactions. Because B’s purchase of
Equipment #3 and Parent’s acquisition
of the G stock did not occur pursuant to
the same series of related transactions,
the Stock and Asset Acquisition Rule
does not apply. In addition, B is not
treated under the Group Prior Use Rule
as having a prior depreciable interest in
Equipment #3 at the time of the
purchase because neither G nor any
other member of the Parent group had
a depreciable interest in Equipment #3
while a member of the Parent group
within the lookback period. Further, B
itself did not have a depreciable interest
in Equipment #3 within the lookback
period. Accordingly, B’s acquisition of
Equipment #3 satisfies the No Prior Use
Requirement. Assuming all other
requirements in § 1.168(k)–2 are
satisfied, B is eligible to claim the
additional first year depreciation
deduction for Equipment #3 in 2019.
(4) Example 4: Termination of the
consolidated group—(i) Facts. S owns
Equipment #4. In 2018, S sells
Equipment #4 to U. In 2019, X acquires
all of the stock of Parent in a transaction
that causes the Parent group to
terminate and Parent, B, and S to
become members of the X group. In
2020, in a transaction that is not part of
a series of related transactions, B
purchases Equipment #4 from U and
places it in service in the same year.
(ii) Analysis. B’s acquisition of
Equipment #4 satisfies the No Prior Use
Requirement. The Group Prior Use Rule
does not apply to treat B as having a
prior depreciable interest in Equipment
#4 because B is a member of the X group
and no member of the X group had a
depreciable interest in Equipment #4
while a member of the X group within
the lookback period. Further, B itself
did not have a prior depreciable interest
in Equipment #4 within the lookback
period. Assuming all other requirements

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in § 1.168(k)–2 are satisfied, B is eligible
to claim the additional first year
depreciation deduction for Equipment
#4 in 2020.
(iii) S purchases Equipment #4 in
2020. The facts are the same as in
paragraph (d)(4)(i) of this section, except
that S rather than B purchases and
places in service Equipment #4 in 2020.
S’s purchase of Equipment #4 does not
satisfy the No Prior Use Requirement
because S had a depreciable interest in
Equipment #4 within the lookback
period. Thus, S is not eligible to claim
the additional first year depreciation
deduction for Equipment #4 in 2020.
(iv) Acquisitions are part of the same
series of related transactions. The facts
are the same as in paragraph (d)(4)(i) of
this section, except that X’s acquisition
of the Parent stock and B’s purchase of
Equipment #4 are part of the same series
of related transactions. Thus, pursuant
to the same series of related
transactions, S became a member of the
X group and B (another member of the
X group) acquired Equipment #4.
Because S had a depreciable interest in
Equipment #4 within the lookback
period, B is treated as having a
depreciable interest in Equipment #4
under the Stock and Asset Acquisition
Rule. As a result, B’s acquisition of
Equipment #4 does not satisfy the No
Prior Use Requirement, and B is not
eligible to claim the additional first year
depreciation deduction for Equipment
#4 in 2020.
(5) Example 5: Intercompany sale of
eligible property followed by sale of B
stock as part of the same series of
related transactions—(i) Facts. S has a
depreciable interest in Equipment #5.
On January 1, 2019, B purchases
Equipment #5 from S and places it in
service. On June 1, 2019, as part of the
same series of related transactions that
includes B’s purchase of Equipment #5,
Parent sells all of the stock of B to X.
Thus, B leaves the Parent group at the
end of the day on June 1, 2019, and B
is a member of the X group starting June
2, 2019. See § 1.1502–76(b). As of June
1, 2019, Equipment #5 remains eligible
property.
(ii) Analysis—(A) Application of the
Consolidated Asset Acquisition Rule. B
was a member of the Parent group when
it acquired Equipment #5. Because S,
another member of the Parent group,
had a depreciable interest in Equipment
#5 while a member of the group within
the lookback period, B would be treated
as having a prior depreciable interest in
Equipment #5 under the Group Prior
Use Rule and B’s acquisition of
Equipment #5 would not satisfy the No
Prior Use Requirement. However, B’s
acquisition of Equipment #5 satisfies the

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requirements of the Consolidated Asset
Acquisition Rule in paragraph (c)(1)(ii)
of this section. First, B’s acquisition of
Equipment #5 meets the requirements of
§ 1.168(k)–2(b)(3)(iii)(A) without regard
to the related-party tests under section
179(d)(2)(A) or (B) and § 1.179–
4(c)(1)(ii) or (iii) or the Group Prior Use
Rule. Second, as part of the same series
of related transactions that includes B’s
acquisition of Equipment #5, B ceases to
be a member of the Parent group and
ceases to be Related to S. Third,
Equipment #5 continues to be eligible
property on the deconsolidation date
(June 1, 2019).
(B) Consequences of the Consolidated
Asset Acquisition Rule. Under the
Consolidated Asset Acquisition Rule, B
is treated for all Federal income tax
purposes as transferring Equipment #5
to an unrelated person on June 2, 2019,
in exchange for an amount of cash equal
to the deemed sale amount and,
immediately thereafter, acquiring
deemed replacement property (New
Equipment #5) from an unrelated person
for an amount of cash equal to the
deemed sale amount. Accordingly,
assuming all other requirements in
§ 1.168(k)–2 are satisfied, B is eligible to
claim the additional first year
depreciation for an amount equal to the
deemed sale amount for the taxable year
in which it places New Equipment #5 in
service.
(iii) Distribution of B. The facts are the
same as in paragraph (d)(5)(i) of this
section, except that, on June 1, 2019,
Parent distributes the stock of B to its
shareholders (which are not Related to
S) in a distribution that qualifies for
nonrecognition under section 355(a).
Accordingly, the Consolidated Asset
Acquisition Rule applies. As in
paragraph (d)(5)(ii)(B) of this section,
assuming all other requirements in
§ 1.168(k)–2 are satisfied, B is eligible to
claim the additional first year
depreciation deduction for an amount
equal to the deemed sale amount for the
taxable year in which it places New
Equipment #5 in service.
(iv) Equipment #5 ceases to be eligible
property. The facts are the same as in
paragraph (d)(5)(i) of this section, except
that, on June 1, 2019, Equipment #5 is
no longer eligible property. The
Consolidated Asset Acquisition Rule
does not apply because B’s acquisition
of Equipment #5 fails to satisfy the
requirement in paragraph (c)(1)(ii)(C) of
this section that the acquired eligible
property continue to be eligible property
on the deconsolidation date. Therefore,
B’s acquisition of Equipment #5 on
January 1, 2019, fails to satisfy the No
Prior Use Requirement. Under the
Group Prior Use Rule, B is treated as

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having a prior depreciable interest in
Equipment #5 because B is a member of
the Parent group and S, while a member
of the Parent group, had a depreciable
interest in Equipment #5 within the
lookback period. Accordingly, B is not
eligible to claim the additional first year
depreciation deduction with respect to
Equipment #5 in 2019.
(6) Example 6: Intercompany sale of
member stock for which a section
338(h)(10) election is made followed by
sale of B stock as part of a series of
related transactions—(i) Facts. S owns
all of the stock of T, which has a
depreciable interest in Equipment #6.
On January 1, 2019, B purchases all of
the T stock from S in a qualified stock
purchase for which a section 338(h)(10)
election is made. On June 1, 2019, as
part of the same series of related
transactions that includes B’s purchase
of the T stock, Parent sells all of the
stock of B to X. Thus, B and T leave the
Parent group at the end of the day on
June 1, 2019, and B and T are members
of the X group starting June 2, 2019. See
§ 1.1502–76(b). As of June 1, 2019,
Equipment #6 remains eligible property.
(ii) Analysis—(A) Section 338(h)(10)
election. Pursuant to the section
338(h)(10) election, Old T is treated as
transferring all of its assets, including
Equipment #6, to an unrelated person in
a single transaction in exchange for
consideration at the close of the
acquisition date (January 1, 2019), and
New T is treated as acquiring all of its
assets, including Equipment #6, from an
unrelated person in exchange for
consideration. Old T is deemed to
liquidate following the deemed asset
sale. See § 1.338–1(a)(1).
(B) Application of the Consolidated
Deemed Acquisition Rule. New T was a
member of the Parent group when New
T acquired Equipment #6 from an
unrelated person. Because Old T,
another member of the Parent group,
had a depreciable interest in Equipment
#6 while a member of the group within
the lookback period, New T would be
treated as having a prior depreciable
interest in Equipment #6 under the
Group Prior Use Rule and New T’s
acquisition of Equipment #6 would not
satisfy the No Prior Use Requirement.
However, New T’s acquisition of
Equipment #6 satisfies the requirements
of the Consolidated Deemed Acquisition
Rule in paragraph (c)(2)(ii) of this
section. First, New T’s acquisition of
Equipment #6 meets the requirements of
§ 1.168(k)–2(b)(3)(iii)(A) without regard
to the Group Prior Use Rule. Second, as
part of the same series of related
transactions that includes B’s qualified
stock purchase of the T stock, B and
New T cease to be members of the

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Parent group and cease to be Related to
S. Third, Equipment #6 continues to be
eligible property on the deconsolidation
date (June 1, 2019).
(C) Consequences of the Consolidated
Deemed Acquisition Rule. Under the
Consolidated Deemed Acquisition Rule,
New T is treated for all Federal income
tax purposes as transferring Equipment
#6 to an unrelated person on June 2,
2019, in exchange for an amount of cash
equal to the deemed sale amount and,
immediately thereafter, acquiring
deemed replacement property (New
Equipment #6) from an unrelated person
for an amount of cash equal to the
deemed sale amount. Accordingly,
assuming all other requirements in
§ 1.168(k)–2 are satisfied, New T is
eligible to claim the additional first year
depreciation deduction for an amount
equal to the deemed sale amount for the
taxable year in which it places New
Equipment #6 in service.
(iii) T owns multiple assets. The facts
are the same as in paragraph (d)(6)(i) of
this section, except that, in addition to
Equipment #6, T also owns Asset A
(depreciable real estate that is not
eligible property). With respect to
Equipment #6, the results are the same
as in paragraph (d)(6)(ii) of this section.
However, the Consolidated Deemed
Acquisition Rule does not apply to
Asset A because it is not eligible
property. Accordingly, New T is not
treated as transferring Asset A to an
unrelated person on June 2, 2019 and
then, immediately thereafter, acquiring
deemed replacement property for Asset
A. If Equipment #6 had ceased to be
eligible property as of June 1, 2019, the
Consolidated Deemed Acquisition Rule
also would not apply to Equipment #6.
(7) Example 7: Section 355
transaction following a section
338(h)(10) transaction pursuant to the
same series of related transactions—(i)
Facts. T has a depreciable interest in
Equipment #7. On January 1, 2019,
Parent contributes all of the stock of T
to B in exchange for common and nonvoting preferred stock of B and sells the
non-voting preferred stock of B to U
pursuant to a binding commitment
entered into prior to the contribution (T
Exchange). The non-voting preferred
stock is not treated as ‘‘stock’’ for
purposes of section 1504(a). See section
1504(a)(4). Parent and B jointly make an
election under section 338(h)(10) with
respect to the T Exchange. On June 1,
2019, as part of the same series of
related transactions that includes the T
Exchange, Parent contributes the stock
of B and assets comprising an active
trade or business (within the meaning of
section 355(b)) to Controlled in
exchange for Controlled common stock

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71769

and then distributes the Controlled
common stock to Parent’s shareholders
in a distribution qualifying under
section 355(a) (Controlled Distribution).
In the Controlled Distribution, T and B
cease to be Related to Parent. Equipment
#7 remains eligible property on June 1,
2019.
(ii) Section 338(h)(10) election.
Immediately after the Controlled
Distribution, Parent and B are not
related as determined under section
338(h)(3)(A)(iii). Further, B’s basis in
the T stock is not determined, in whole
or in part, by reference to the adjusted
basis of the T stock in the hands of
Parent, and the stock is not acquired in
an exchange to which section 351, 354,
355, or 356 applies. Accordingly, the T
Exchange qualifies as a ‘‘purchase’’
within the meaning of section 338(h)(3).
Pursuant to the section 338(h)(10)
election, Old T is treated as transferring
all of its assets, including Equipment #7,
to an unrelated person in a single
transaction in exchange for
consideration at the close of the
acquisition date (January 1, 2019), and
New T is treated as acquiring all of its
assets, including Equipment #7, from an
unrelated person in exchange for
consideration. Old T is deemed to
liquidate following the deemed asset
sale. See § 1.338–1(a)(1).
(iii) Application of the Consolidated
Deemed Acquisition Rule. New T was a
member of the Parent group when New
T acquired Equipment #7 from an
unrelated person. Because Old T,
another member of the Parent group,
had a depreciable interest in Equipment
#7 while a member of the group within
the lookback period, New T would be
treated as having a prior depreciable
interest in Equipment #7 under the
Group Prior Use Rule and New T’s
acquisition of Equipment #7 would not
satisfy the No Prior Use Requirement.
However, New T’s acquisition of
Equipment #7 satisfies the requirements
of the Consolidated Deemed Acquisition
Rule in paragraph (c)(2)(ii) of this
section. Thus, New T is treated for all
Federal income tax purposes as
transferring Equipment #7 to an
unrelated person on June 2, 2019, in
exchange for an amount of cash equal to
the deemed sale amount and,
immediately thereafter, acquiring
deemed replacement property (New
Equipment #7) from an unrelated person
for an amount of cash equal to the
deemed sale amount. Accordingly,
assuming all other requirements in
§ 1.168(k)–2 are satisfied, New T is
eligible to claim the additional first year
depreciation deduction for an amount
equal to the deemed sale amount for the

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taxable year in which it places New
Equipment #7 in service.
(e) Applicability dates—(1) In general.
Except as provided in paragraph (e)(2)
of this section, this section applies to—
(i) Depreciable property acquired after
September 27, 2017, by the taxpayer and
placed in service by the taxpayer during
or after the taxpayer’s taxable year that
begins on or after January 1, 2021;
(ii) A specified plant for which the
taxpayer properly made an election to
apply section 168(k)(5) and that is
planted, or grafted to a plant that was
previously planted, by the taxpayer
during or after the taxpayer’s taxable
year that begins on or after January 1,
2021; and
(iii) Components acquired or selfconstructed after September 27, 2017, of
larger self-constructed property
described in § 1.168(k)–2(c)(2) and
placed in service by the taxpayer during
or after the taxpayer’s taxable year that
begins on or after January 1, 2021.
(2) Early application of this section
and § 1.168(k)–2—(i) In general. Subject
to paragraphs (e)(2)(ii) and (iii) of this
section, and provided that all members
of a consolidated group consistently
apply the same set of rules, a taxpayer

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may choose to apply both the rules of
this section and the rules of § 1.168(k)–
2, in their entirety and in a consistent
manner, to—
(A) Depreciable property acquired
after September 27, 2017, by the
taxpayer and placed in service by the
taxpayer during a taxable year ending
on or after September 28, 2017;
(B) A specified plant for which the
taxpayer properly made an election to
apply section 168(k)(5) and that is
planted, or grafted to a plant that was
previously planted, after September 27,
2017, by the taxpayer during a taxable
year ending on or after September 28,
2017; and
(C) Components acquired or selfconstructed after September 27, 2017, of
larger self-constructed property
described in § 1.168(k)–2(c)(2) and
placed in service by the taxpayer during
a taxable year ending on or after
September 28, 2017.
(ii) Early application to certain
transactions. In the case of property
described in paragraph (e)(2)(i) of this
section that is acquired in a transaction
that satisfies the requirements of
paragraph (c)(1)(ii) or (c)(2)(ii) of this
section, the taxpayer may apply the

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rules of this section and the rules of
§ 1.168(k)–2, in their entirety and in a
consistent manner, to such property
only if those rules are applied, in their
entirety and in a consistent manner, by
all parties to the transaction (including
the transferor member, the transferee
member, and the target, as applicable)
and the consolidated groups of which
they are members, for the taxable year(s)
in which the transaction occurs and the
taxable year(s) that includes the day
after the deconsolidation date.
(iii) Bound by early application. Once
a taxpayer applies the rules of this
section and the rules of § 1.168(k)–2, in
their entirety, for a taxable year, the
taxpayer must continue to apply the
rules of this section and the rules of
§ 1.168(k)–2, in their entirety, for the
taxpayer’s subsequent taxable years.
Sunita Lough,
Deputy Commissioner for Services and
Enforcement.
Approved: September 16, 2020.
David J. Kautter,
Assistant Secretary of the Treasury (Tax
Policy).
[FR Doc. 2020–21112 Filed 11–5–20; 4:15 pm]
BILLING CODE 4830–01–P

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