Bonus Depreciation—A Case Study in TEI Advocacy

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Welcome to another installment of Advocacy Agenda, a periodic column that aims to share select insights and observations of interest to TEI members about the post-tax reform advocacy environment in Washington, D.C. The historic tax reforms enacted in Public Law 115-97, colloquially known as the Tax Cuts and Jobs Act (TCJA), have inspired many TEI members to become more involved in the Institute’s advocacy activities at the federal level. Last fiscal year, well over 100 members working for companies in different industries across the country participated in one or more working groups to help shape TEI’s advocacy positions concerning major TCJA-related guidance proposals. The result was a major contribution to the administrative record on behalf of U.S. corporate taxpayers and the in-house tax professionals who support them.

At the time of this writing, from a guidance standpoint, approximately sixty percent of the TCJA’s provisions have been fully implemented. Many of the TCJA’s other provisions—which you may know by their distinctive acronyms—have been the subject of proposed, temporary, or even final guidance to varying degrees. Unsurprisingly, these provisions also represent some of the TCJA’s most significant reforms from a corporate income tax perspective and will ultimately require reams of regulatory or other administrative guidance to implement. That guidance has been the principal focus of TEI’s TCJA-related advocacy efforts to date, the results of which are now beginning to show.

In late summer and early fall 2018, a diverse cross-industry group of TEI members worked to analyze and comment on the newly proposed Treasury regulations under Section 168(k) of the Internal Revenue Code (REG-104397-18). As amended by the TCJA, Section 168(k) generally allows a 100-percent additional first-year depreciation deduction (bonus depreciation) for qualified property acquired and placed in service after September 27, 2017. The proposed regulations were intended to address the statutory requirements for depreciable property to qualify for bonus depreciation under Section 168(k), which Congress had amended to promote capital investment, stimulate economic growth, and reduce taxpayer costs. Many TEI members, however, saw in the proposed regulations significant—and unwarranted—departures from existing law that would have negatively impacted not only the cost of previously committed capital but also the cost of tax compliance for their companies. Most notably:

  • the proposed regulations would have provided that property manufactured, constructed, or produced for the taxpayer by another person under a written binding contract for use by the taxpayer in its trade or business, or for its production of income, is considered to be property “acquired pursuant to a written binding contract”—instead of self-constructed property; and
  • with respect to acquired components of self- constructed property, the proposed regulations would have provided that, if a binding contract to acquire a component was entered into before September 28, 2017, the component does not qualify for the additional first-year depreciation deduction.

The nature of and widespread interest in these concerns made the proposed Section 168(k) regulations an ideal subject for TEI advocacy.

On October 9, 2018, TEI submitted comments and recommendations to the Internal Revenue Service’s Office of Associate Chief Counsel (Income Tax and Accounting). TEI’s comments focused in depth on the foregoing acquisition requirements of the proposed regulations, which were found to be of greatest mutual concern to TEI members. Specifically, TEI urged the government to:

  • retain the existing law treatment of property that is manufactured, constructed, or produced for the taxpayer by another person under a written binding contract for use by the taxpayer in its trade or business, or for its production of income, as self-constructed property, not as property acquired pursuant to a written binding contract; and
  • provide a component election similar to the one provided in Section 3.02(2)(b) of Revenue Procedure 2011-26 for components of larger self-constructed property where the manufacture, construction, or production of the larger self-constructed property began before September 28, 2017.

In early 2019, members of TEI’s Executive Committee met with officials in the Treasury Department’s Office of Tax Policy to discuss TEI’s comments and recommendations. In appropriate cases, follow-up meetings with relevant Treasury or IRS officials may serve as an ideal forum for TEI members to provide candid, real-world feedback and examples of what proposed rules would actually mean to businesses and their tax functions. Practical examples offered by TEI members represent valuable insights that only in-house tax professionals can provide.

On September 24, 2019, TEI’s efforts were ultimately vindicated when Treasury and the IRS issued final and (new) proposed regulations under Section 168(k). Collectively, these rules adopted both of TEI’s principal recommendations concerning the property acquisition requirements under Section 168(k), as set forth above. The significance of the final regulations’ retention of the traditional definition of self-constructed property for purposes of Section 168(k), in particular, cannot be overstated. This outcome underscores the important role that TEI and its members can play in the development of tax policy.

Wash, Rinse, and Repeat

In 2020, TEI will undertake new TCJA-related advocacy projects as additional implementation guidance is released. TEI’s Tax Reform Task Force will also begin planning for the Institute’s second annual round of U.S. congressional liaison meetings, where tax technical corrections and other legislative changes will likely be our focus. If you or someone you know would like to become involved in any of these efforts, please let me know.

Watson M. McLeish is tax counsel for Tax Executives Institute, Inc. in Washington, D.C., where he coordinates the advocacy activities of the Institute’s Tax Reform Task Force, Federal Tax Committee, and Canadian Income Tax Committee. TEI members interested in joining an Institute-level advocacy project should contact him at[email protected].

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