Internal Revenue Bulletin 2018-41 (PDF rendition): IRS Notices

Preserve advance releases and the authoritative Internal Revenue Bulletin rendition; directory timestamps are file-publication metadata, not legal effective dates. HTML bulletins begin June 2003; earlier available issues require full PDF parsing. Whole bulletin rendition: numbered items are identified below; other legal material and publisher context remain included. This is not a new standalone advance release.

# INTERNAL REVENUE BULLETIN

IRS

Bulletin No. 2018-41
October 9, 2018

## HIGHLIGHTS OF THIS ISSUE

These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.

## EMPLOYMENT TAX

### Notice 2018-75, page 556.

The notice provides that section 132(g)(2)'s suspension of the
exclusion from income provided by section 132(a)(6) does not
apply to amounts received directly or indirectly by an individual
in 2018 from an employer for expenses incurred in connection
with a move occurring prior to January 1, 2018, that would
have been deductible as moving expenses under section 217
of the Code if they had been paid directly by the individual prior
to January 1, 2018, and that otherwise satisfy the require-
ments under section 132(g)(1).

## Income Tax

### REV. RUL. 2018-27, page 546.

Federal rates; adjusted federal rates; adjusted federal long-
term rate, the long-term exempt rate, and the blended annual
rate. For purposes of sections 382, 1274, 1288, 7872 and
other sections of the Code, tables set forth the rates for
October 2018.

### REV. PROC. 2018-49, page 548.

Rev. Proc. 2018-49 modifies Rev. Proc. 2018-29, 2018-22
I.R.B. 634, and Rev. Proc. 2018-31, 2018-22 I.R.B. 637, to
allow a taxpayer that early adopted a method of recognizing
revenues described in the new financial accounting standards
issued by the Financial Accounting Standards Board (FASB) and
International Accounting Standards Board (IASB) (New Stan-
dards) to change its method of accounting for the recognition
of income for federal income tax purposes to a method of
recognizing revenues described in the New Standards under
section 16.11 of Rev. Proc. 2018-31.

### Notice 2018-71, page 548.

The notice provides guidance on the employer credit for paid
family and medical leave under Code section 45S. The credit may
be claimed by eligible employers and is equal to a percentage of
wages paid to qualifying employees while they are on family and

medical leave. The credit is effective only for wages paid in
taxable years of the employer beginning after December 31,
2017, and before January 1, 2020. The notice provides guidance
on issues arising under section 45S, including the requirements an
employer must satisfy to be an eligible employer, the types of leave
that are family and medical leave under section 45S, the minimum
paid leave requirements, the calculation of the credit, and the impact
of state-mandated leave on the availability of the credit.

### REG-104397-18, page 558.

These proposed regulations provide guidance regarding the ad-
ditional first year depreciation deduction under section 168(k) and
reflect changes made by the Tax Cuts and Jobs Act.

### REG-130244-17, page 591.

This document proposes removing final regulations setting forth
minimum documentation requirements that ordinarily must be
satisfied in order for certain related-party interests in a corpora-
tion to be treated as indebtedness for federal tax purposes
(Documentation Regulations). This notice of proposed rulemaking
also proposes conforming amendments to other final regulations to
reflect the proposed removal of the Documentation Regulations.

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## The IRS Mission

Provide America's taxpayers top-quality service by helping
them understand and meet their tax responsibilities and en-
force the law with integrity and fairness to all.

## Introduction

The Internal Revenue Bulletin is the authoritative instrument of
the Commissioner of Internal Revenue for announcing official
rulings and procedures of the Internal Revenue Service and for
publishing Treasury Decisions, Executive Orders, Tax Conven-
tions, legislation, court decisions, and other items of general
interest. It is published weekly.

It is the policy of the Service to publish in the Bulletin all
substantive rulings necessary to promote a uniform application
of the tax laws, including all rulings that supersede, revoke,
modify, or amend any of those previously published in the
Bulletin. All published rulings apply retroactively unless other-
wise indicated. Procedures relating solely to matters of internal
management are not published; however, statements of inter-
nal practices and procedures that affect the rights and duties
of taxpayers are published.

Revenue rulings represent the conclusions of the Service on
the application of the law to the pivotal facts stated in the
revenue ruling. In those based on positions taken in rulings to
taxpayers or technical advice to Service field offices, identify-
ing details and information of a confidential nature are deleted
to prevent unwarranted invasions of privacy and to comply with
statutory requirements.

Rulings and procedures reported in the Bulletin do not have the
force and effect of Treasury Department Regulations, but they
may be used as precedents. Unpublished rulings will not be
relied on, used, or cited as precedents by Service personnel in
the disposition of other cases. In applying published rulings and
procedures, the effect of subsequent legislation, regulations,
court decisions, rulings, and procedures must be considered,
and Service personnel and others concerned are cautioned

against reaching the same conclusions in other cases unless
the facts and circumstances are substantially the same.

The Bulletin is divided into four parts as follows:

### Part I .- 1986 Code.

This part includes rulings and decisions based on provisions of
the Internal Revenue Code of 1986.

### Part II .- Treaties and Tax Legislation.

This part is divided into two subparts as follows: Subpart A, Tax
Conventions and Other Related Items, and Subpart B, Legisla-
tion and Related Committee Reports.

Part III .- Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to these
subjects are contained in the other Parts and Subparts. Also
included in this part are Bank Secrecy Act Administrative Rul-
ings. Bank Secrecy Act Administrative Rulings are issued by
the Department of the Treasury's Office of the Assistant Sec-
retary (Enforcement).

### Part IV .- Items of General Interest.

This part includes notices of proposed rulemakings, disbar-
ment and suspension lists, and announcements.

The last Bulletin for each month includes a cumulative index for
the matters published during the preceding months. These
monthly indexes are cumulated on a semiannual basis, and are
published in the last Bulletin of each semiannual period.

The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.

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## Part I. Rulings and Decisions Under the Internal Revenue Code of 1986

### Section 1274 .- Determina- tion of Issue Price in the Case of Certain Debt Instruments Issued for Property

(Also Sections 42, 280G, 382, 467, 468, 482, 483,
1288, 7520, 7872.)

#### Rev. Rul. 2018-27

This revenue ruling provides various
prescribed rates for federal income tax

purposes for October 2018 (the current
month). Table 1 contains the short-term,
mid-term, and long-term applicable fed-
eral rates (AFR) for the current month for
purposes of section 1274(d) of the Internal
Revenue Code. Table 2 contains the short-
term, mid-term, and long-term adjusted
applicable federal rates (adjusted AFR)
for the current month for purposes of sec-
tion 1288(b). Table 3 sets forth the ad-
justed federal long-term rate and the long-
term tax-exempt rate described in section
382(f). Table 4 contains the appropriate

percentages for determining the low-
income housing credit described in sec-
tion 42(b)(1) for buildings placed in ser-
vice during the current month. However,
under section 42(b)(2), the applicable per-
centage for non-federally subsidized new
buildings placed in service after July 30,
2008, shall not be less than 9%. Finally,
Table 5 contains the federal rate for de-
termining the present value of an annuity,
an interest for life or for a term of years, or
a remainder or a reversionary interest for
purposes of section 7520.

REV. RUL. 2018-27 TABLE 1 Applicable Federal Rates (AFR) for October 2018 Period for Compounding

Annual

Semiannual Short-term

Quarterly

Monthly

AFR

2.55%

2.53%

2.52%

2.52%

110% AFR

2.80%

2.78%

2.77%

2.76%

120% AFR

3.06%

3.04%

3.03%

3.02%

130% AFR

3.32%

3.29%

3.28%

3.27%

Mid-term

AFR

2.83%

2.81%

2.80%

2.79%

110% AFR

3.11%

3.09%

3.08%

3.07%

120% AFR

3.40%

3.37%

3.36%

3.35%

130% AFR

3.68%

3.65%

3.63%

3.62%

150% AFR

4.26%

4.22%

4.20%

4.18%

175% AFR

4.98%

4.92%

4.89%

4.87%

AFR

Long-term

2.99%

2.97%

2.96%

2.95%

110% AFR

3.30%

3.27%

3.26%

3.25%

120% AFR

3.59%

3.56%

3.54%

3.53%

130% AFR

3.90%

3.86%

3.84%

3.83%

REV. RUL. 2018-27 TABLE 2 Adjusted AFR for October 2018 Period for Compounding

Annual

Semiannual

Quarterly

Monthly

Short-term adjusted AFR

1.93%

1.92%

1.92%

1.91%

Mid-term adjusted AFR

2.14%

2.13%

2.12%

2.12%

Long-term adjusted AFR

2.27%

2.26%

2.25%

2.25%

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# REV. RUL. 2018-27 TABLE 3 Rates Under Section 382 for October 2018

Adjusted federal long-term rate for the current month
Long-term tax-exempt rate for ownership changes during the current month (the highest of the adjusted
federal long-term rates for the current month and the prior two months

2.27%

2.29%

## REV. RUL. 2018-27 TABLE 4 Appropriate Percentages Under Section 42(b)(1) for October 2018

Note: Under section 42(b)(2), the applicable percentage for non-federally subsidized new buildings placed in service after
July 30, 2008, shall not be less than 9%.

Appropriate percentage for the 70% present value low-income housing credit

7.67%

Appropriate percentage for the 30% present value low-income housing credit

3.29%

## REV. RUL. 2018-27 TABLE 5 Rate Under Section 7520 for October 2018

Applicable federal rate for determining the present value of an annuity, an interest for life or a term of years,
or a remainder or reversionary interest

3.4%

### Section 42 .- Low-Income Housing Credit

The applicable federal short-term, mid-term, and
long-term rates are set forth for the month of October
2018. See Rev. Rul. 2018-27, page 546.

## Section 280G .- Golden Parachute Payments

The applicable federal short-term, mid-term, and
long-term rates are set forth for the month of October
2018. See Rev. Rul. 2018-27, page 546.

## Section 382 .- Limitation on Net Operating Loss Carryforwards and Certain Built-In Losses Following Ownership Change

The adjusted applicable federal long-term rate is
set forth for the month of October 2018. See Rev.
Rul. 2018-27, page 546.

## Section 467 .- Certain Payments for the Use of Property or Services

The applicable federal short-term, mid-term, and
long-term rates are set forth for the month of October
2018. See Rev. Rul. 2018-27, page 546.

## Section 468 .- Special Rules for Mining and Solid Waste Reclamation and Closing Costs

The applicable federal short-term, mid-term, and
long-term rates are set forth for the month of October
2018. See Rev. Rul. 2018-27, page 546.

## Section 482 .- Allocation of Income and Deductions Among Taxpayers

The applicable federal short-term, mid-term, and
long-term rates are set forth for the month of October
2018. See Rev. Rul. 2018-27, page 546.

## Section 483 .- Interest on Certain Deferred Payments

The applicable federal short-term, mid-term, and
long-term rates are set forth for the month of October
2018. See Rev. Rul. 2018-27, page 546.

## Section 1288 .- Treatment of Original Issue Discount on Tax-Exempt Obligations

The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of October 2018. See Rev. Rul. 2018-27, page 546.

## Section 7520 .- Valuation Tables

The applicable federal short-term, mid-term, and
long-term rates are set forth for the month of October
2018. See Rev. Rul. 2018-27, page 546.

## Section 7872 .- Treatment of Loans With Below- Market Interest Rates

The applicable federal short-term, mid-term, and
long-term rates are set forth for the month of October
2018. See Rev. Rul. 2018-27, page 546.

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# Part III. Administrative, Procedural, and Miscellaneous

26 CFR 601.204: Changes in accounting periods
and method of accounting.
(Also: Part I, Sections 446, 451; 1.451-1).

## Rev. Proc. 2018-49

### SECTION 1. PURPOSE

This revenue procedure modifies Rev.
Proc. 2018-29, 2018-22 I.R.B. 634, and
Rev. Proc. 2018-31, 2018-22 I.R.B. 637,
to allow a taxpayer that early adopted
(Early Adopter) a method of recognizing
revenues described in the new financial
accounting standards issued by the Finan-
cial Accounting Standards Board (FASB)
and International Accounting Standards
Board (IASB) (New Standards) to change
its method of accounting for the recogni-
tion of income for federal income tax pur-
poses to a method of recognizing revenues
described in the New Standards under sec-
tion 16.11 of Rev. Proc. 2018-31. Early
adoption of the New Standards was al-
lowed for reporting periods beginning af-
ter December 15, 2016.

## SECTION 2. BACKGROUND

.01 On May 28, 2014, FASB and IASB
jointly announced new financial account-
ing standards for revenue recognition, ti-
tled "Revenue from Contracts with Cus-
tomers (Topic 606)". See FASB Update
No. 2014-09 and IASB International Fi-
nancial Reporting Standard (IFRS) 15.

.02 Publicly-traded entities, certain
not-for-profit entities, and certain em-
ployee benefit plans are required to adopt
the New Standards for annual reporting
periods beginning after December 15,
2017. All other entities are required to
adopt the New Standards for annual re-
porting periods beginning after December
15, 2018. However, early adoption was
allowed for reporting periods beginning
after December 15, 2016. See FASB Up-
date No. 2015-14, "Revenue from Con-
tracts with Customers (Topic 606), Defer-
ral of the Effective Date."

.03 Rev. Proc. 2015-13, 2015-5 I.R.B.
419, as clarified and modified by Rev. Proc.
2015-33, 2015-24 I.R.B. 1067, and as mod-
ified by Rev. Proc. 2016-1, 2016-1 I.R.B.
1, and Rev. Proc. 2017-59, 2017-48 I.R.B.
543, provides the general procedures by
which a taxpayer may obtain automatic con-

sent of the Commissioner to a change in
method of accounting described in the List
of Automatic Changes. Rev. Proc. 2018-31
provides the List of Automatic Changes.

.04 Rev. Proc. 2018-29, as published
in the Internal Revenue Bulletin on May
29, 2018, modified Rev. Proc. 2018-31 to
provide the procedures for taxpayers that
want to change their methods of account-
ing for the recognition of income for fed-
eral income tax purposes to a method of
accounting that they use to recognize rev-
enues under the New Standards. After
Rev. Proc. 2018-29 was released, ques-
tions were received about whether Rev.
Proc. 2018-29 applies to Early Adopters.
This revenue procedure modifies the ef-
fective date in section 5.01 of Rev. Proc.
2018-29, and certain paragraphs of sec-
tion 16.11 of Rev. Proc. 2018-31 to pro-
vide that this automatic method change
applies to Early Adopters.

## SECTION 3. MODIFICATIONS TO REV. PROC. 2018-29 AND REV. PROC. 2018-31

.01 Modifications to Rev. Proc. 2018-
29. Section 5.01 of Rev. Proc. 2018-29 is
modified to read as follows:

.01 In general. Except as otherwise
provided under this section, this revenue
procedure is effective on May 10, 2018,
and applies to taxable years ending on or
before May 10, 2021.

.02 Modifications to Rev. Proc. 2018-
31. Rev. Proc. 2018-29 modified Rev.
Proc. 2018-31 to add new section 16.11
to the List of Automatic Changes. This
revenue procedure also modifies Rev. Proc.
2018-31 to be consistent with the modifi-
cation made to Rev. Proc. 2018-29.

(1) Section 16.11(4) is modified to read
as follows:

(4) Time for making change. The
change under this section 16.11 may only
be made for a taxable year ending on or
before May 10, 2021.

(2) Section 16.11(6) is modified to read
as follows:

(6) Certain eligibility rule inapplicable.
The eligibility rule in section 5.01(1)(f) of
Rev. Proc. 2015-13 does not apply to this
change for a taxable year ending on or be-
fore May 10, 2021.

## SECTION 4. EFFECT ON OTHER DOCUMENTS

This revenue procedure modifies Rev.
Proc. 2018-29 and Rev. Proc. 2018-31.

## SECTION 5. EFFECTIVE DATE

This revenue procedure is effective on
May 10, 2018.

## SECTION 6. DRAFTING INFORMATION

The principal author of this revenue
procedure is Justin R. Grill of the Office
of Associate Chief Counsel (Income Tax
& Accounting). For further information
regarding this revenue procedure, contact
Mr. Grill at (202) 317-7003 (not a toll free
number).

## Employer Credit for Paid Family and Medical Leave Notice 2018-71

### PURPOSE

This notice provides guidance on the
employer credit for paid family and med-
ical leave under section 45S of the Inter-
nal Revenue Code (Code). This notice
also announces that the Department of the
Treasury (Treasury Department) and the
Internal Revenue Service (IRS) intend to
publish proposed regulations under sec-
tion 45S.

### BACKGROUND

Section 45S was added to the Code by
"An Act to Provide for Reconciliation
Pursuant to Titles II and V of the Concur-
rent Resolution on the Budget for Fiscal
Year 2018" (the Act), Pub. L. 115-97,
131 Stat. 2504, enacted December 22,
2017. For purposes of section 38, regard-
ing the general business credit, section
45S establishes a business credit for em-
ployers that provide paid family and med-
ical leave (the credit). The credit is equal
to a percentage of wages paid to qualify-
ing employees while they are on family
and medical leave. As explained below,
the purposes for which an employee may

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take family and medical leave under sec-
tion 45S are the same purposes for which an
employee may take family and medical
leave under title I of the Family and Medical
Leave Act of 1993, as amended (FMLA),
Pub. L. 103-3; 29 U.S.C. sec. 2601.

The questions and answers in this no-
tice provide further details regarding the
requirements of section 45S, but a brief
summary follows. To be eligible to claim
the credit, an employer must have a writ-
ten policy that satisfies certain require-
ments. First, the policy must cover all
qualifying employees; that is, all employ-
ees who have been employed for a year or
more and were paid not more than a spec-
ified amount during the preceding year. In
general, in determining whether an em-
ployee is a qualifying employee in 2018,
the employee must not have had compen-
sation from the employer of more than
$72,000 in 2017. Second, the policy must
provide at least two weeks of annual paid
family and medical leave for each full-
time qualifying employee and at least a
proportionate amount of leave for each
part-time qualifying employee. Third, the
policy must provide for payment of at
least 50 percent of the qualifying employ-
ee's wages while the employee is on leave.
Fourth, if an employer employs qualifying
employees who are not covered by title I of
the FMLA, the employer's written policy
must include language providing "non-
interference" protections, as described in
Section A of this notice. Thus, the written
policy must incorporate the substantive
rules that must be met in order for an em-
ployer to be eligible for the credit.

Any leave paid by a State or local
government or required by State or local
law is not taken into account for any pur-
pose in determining the amount of paid
family and medical leave provided by the
employer. Thus, any such leave is not
taken into account in determining the
amount of paid family and medical leave
provided by the employer, the rate of pay-
ment under the employer's written policy,
or the determination of the credit.

For purposes of the credit, an employer
is any person for whom an individual per-

forms services as an employee under the
usual common law rules applicable in de-
termining the employer-employee rela-
tionship. Similarly, wages qualifying for
the credit generally have the same mean-
ing as wages subject to the Federal Un-
employment Tax Act (FUTA) pursuant to
section 3306(b), determined without re-
gard to the $7,000 FUTA wage limitation.

## GUIDANCE

This notice includes sections on the
following topics:

A. Eligible Employer

B. Family and Medical Leave

C. Minimum Paid Leave Requirements

D. Calculating and Claiming the Credit

E. Effective Date

## A. ELIGIBLE EMPLOYER

The credit is available only to eligible
employers. Under section 45S(c)(1), an
eligible employer is an employer that has
a written policy in place that satisfies the
requirements set forth in Q&A-2 below.
Question 1: Must an employer be subject
to title I of the FMLA to be an eligible
employer under section 45S?1

Answer 1: No. Any employer will be an
eligible employer under section 45S if it
has a written policy in place that provides
paid family and medical leave, as described
in Section B of this notice, satisfies the min-
imum paid leave requirements set forth in
Section C of this notice, and, if applicable,
includes the "non-interference" language
described in Q&A-3.

Question 2: What must an eligible em-
ployer's written policy provide?

Answer 2: An eligible employer's written
policy must provide paid family and med-
ical leave, as described in Section B of
this notice (Q&A-8 through Q&A-11) and
must satisfy the minimum paid leave re-
quirements set forth in Section C of this
notice (Q&A-12 through Q&A-21). In
summary, an eligible employer's written
policy must provide all qualifying em-
ployees with at least two weeks of paid
family and medical leave (prorated for

part-time employees), at a rate of at least
50 percent of the employee's normal
wages, as these terms are defined and de-
scribed in more detail in Sections B and C
of this notice. In addition, if the employer
employs any qualifying employees, as de-
fined in Q&A-12, who are not covered by
title I of the FMLA, the employer's written
policy must include "non-interference" lan-
guage, as set forth in Q&A-3.

Question 3: If an employer employs any
qualifying employees who are not covered
by title I of the FMLA, do additional re-
quirements apply in determining whether
the employer is an eligible employer ??

Answer 3: Yes. If an employer employs at
least one qualifying employee who is not
covered by title I of the FMLA (including
any employee who is not covered by title
I of the FMLA because he or she works
less than 1,250 hours per year), in accor-
dance with section 45S(c)(2), the em-
ployer must include "non-interference"
language in its written policy and comply
with this language to be an eligible em-
ployer. This requirement applies to: (a) an
employer subject to title I of the FMLA
that has at least one qualifying employee
who is not covered by title I of the FMLA,
and (b) an employer not subject to title I
of the FMLA (that, thus, has no employ-
ees covered by title I of the FMLA). The
"non-interference" language must ensure
that the employer will not interfere with,
restrain, or deny the exercise of, or the
attempt to exercise, any right provided
under the policy, and will not discharge,
or in any other manner discriminate
against, any individual for opposing any
practice prohibited by the policy. The fol-
lowing "non-interference" language is an
example of a written provision that would
satisfy section 45S:

[Employer] will not interfere with, re-
strain, or deny the exercise of, or the
attempt to exercise, any right provided
under this policy. [Employer] will not
discharge, or in any other manner dis-
criminate against, any individual for
opposing any practice prohibited by
this policy.

Question 4: Must an eligible employer's

1Section 101(4) of the FMLA defines "employer" as any person engaged in commerce or in any industry or activity affecting commerce who employs 50 or more employees for each working
day during each of 20 or more calendar workweeks in the current or preceding calendar year, which includes (a) any person who acts, directly or indirectly, in the interest of an employer
to any of the employees of such employer; and (b) any successor in interest of an employer; and includes any "public agency," as defined in section 3(x) of the Fair Labor Standards Act
of 1938 (29 U.S.C. 203(x)).

2An employer that employs any qualifying employees who are not covered by title I of the FMLA is an "added employer" under section 45S(c)(2)(B)(ii)).

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written policy under section 45S be set
forth in a single, separate document or
meet other documentary requirements?
Answer 4: An eligible employer's written
policy under section 45S may be set forth
in a single document or in multiple docu-
ments. For example, an employer may
maintain different documents to cover dif-
ferent classifications of employees or dif-
ferent types of leave, and those documents
collectively will constitute the employer's
written policy under section 45S. An eli-
gible employer's written policy under sec-
tion 45S also may be included in the same
document that governs the employer's
other leave policies. However, if an em-
ployer's written policy provides paid
leave for FMLA purposes and additional
paid leave for other reasons (such as va-
cation or personal leave), only the leave
specifically designated for FMLA pur-
poses is considered to be family and med-
ical leave under section 45S. See Q&A-9.
Question 5: What is the general rule for
determining when an employer's written
policy must be in place?

Answer 5: Except as provided in the tran-
sition rule in Q&A-6 for the first taxable
year of an employer beginning after De-
cember 31, 2017, the employer's written
policy must be in place before the paid
family and medical leave for which
the employer claims the credit is taken.
The written policy is considered to be in
place on the later of the policy's adoption
date or the policy's effective date.

Example. Facts: Employer adopts a written policy
that satisfies all of the requirements of section 45S on
June 15, 2019, with an effective date of July 1, 2019.

Conclusion: Assuming all other requirements for
the credit are met, Employer may claim the credit
with respect to family and medical leave paid in
accordance with that policy to qualifying employees
for leave taken on or after July 1, 2019.

Question 6: For the first taxable year of an
employer beginning after December 31,
2017, what is the transition rule for deter-
mining when the employer's written pol-
icy must be in place?

Answer 6: For an employer's first taxable
year beginning after December 31, 2017,
a written leave policy or an amendment to
a policy (whether it is a new policy for the
taxable year or an existing policy) will be
considered to be in place as of the effec-
tive date of the policy (or amendment),
rather than a later adoption date, if (a) the
policy (or amendment) is adopted on or

before December 31, 2018, and (b) the
employer brings its leave practices into
compliance with the terms of the retroac-
tive policy (or retroactive amendment) for
the entire period covered by the policy (or
amendment), including making any retro-
active leave payments no later than the
last day of the taxable year.

Example 1. Facts: Employer's taxable year is the
calendar year. Employee takes two weeks of unpaid
family and medical leave beginning January 15,
2018. Employer adopts a written policy that satisfies
the requirements of section 45S on October 1, 2018,
and chooses to make the policy effective retroactive
to January 1, 2018. At the time the policy is adopted,
Employer pays Employee (at a rate of payment pro-
vided by the policy) for the two weeks of unpaid
leave taken in January 2018.

Conclusion: Assuming all other requirements for
the credit are met, Employer may claim the credit
with respect to the family and medical leave paid to
Employee for the leave taken in January 2018.

Example 2. Facts: Employer's taxable year is the
calendar year. Employer amends its FMLA policy in
writing on April 15, 2018, effective for leave taken
on or after April 15, 2018, to provide that four weeks
of FMLA leave will be paid leave. Employer's
FMLA policy does not provide for leave for quali-
fying employees who are not covered by title I of the
FMLA or include "non-interference" language. Em-
ployee, who is a qualifying employee, but who is not
covered by title I of the FMLA, takes three weeks of
unpaid family and medical leave beginning June 18,
2018. On October 1, 2018, Employer amends its
written policy to include "non-interference" lan-
guage and to provide paid leave effective April 15,
2018, for qualifying employees who are not covered
by title I of the FMLA. On October 15, 2018, Em-
ployer pays Employee for the three weeks of family
and medical leave Employee took beginning June
18, 2018.

Conclusion: Assuming all other requirements for
the credit are met, Employer may claim the credit
with respect to the family and medical leave paid to
Employee for the leave taken beginning in June
2018.

Question 7: Is an eligible employer re-
quired to provide notice to employees that
it has a written policy in place providing
for paid family and medical leave under
section 45S?

Answer 7: No. Section 45S does not im-
pose a notice requirement with respect to
the written policy on employers. How-
ever, if an employer chooses to provide
notice of the written policy to qualifying
employees, the policy will not be consid-
ered to provide for paid leave to all qual-
ifying employees as required under sec-
tion 45S, unless the availability of paid
leave is communicated to employees in
a manner reasonably designed to reach
each qualifying employee. This may in-

clude, for example, email communica-
tion, use of internal websites, employee
handbooks, or posted displays in em-
ployee work areas.

## B. FAMILY AND MEDICAL LEAVE

An eligible employer may claim the
credit under section 45S only with respect
to paid family and medical leave. Under
section 45S(e)(1), family and medical
leave means leave for any one or more of
the purposes described under subpara-
graph (A), (B), (C), (D), or (E) of para-
graph (1), or paragraph (3), of section
102(a) of the FMLA ("FMLA purposes"),
whether the leave is provided under the
FMLA or by a policy of the employer.
Under section 45S(e)(2), if an employer
provides paid leave as vacation leave, per-
sonal leave, or medical or sick leave
(other than leave specifically for one or
more of the FMLA purposes), that paid
leave is not considered family and medi-
cal leave under section 45S.

Question 8: What are the FMLA purposes
for which paid family and medical leave
under section 45S may be provided to a
qualifying employee?

Answer 8: The FMLA purposes for which
paid family and medical leave under sec-
tion 45S may be provided are:

(a) The birth of a son or daughter of the
employee and in order to care for the son
or daughter.

(b) The placement of a son or daughter
with the employee for adoption or foster care.

(c) Caring for the spouse, or a son,
daughter, or parent, of the employee, if the
spouse, son, daughter, or parent has a se-
rious health condition.

(d) A serious health condition that
makes the employee unable to perform the
functions of the employee's position.

(e) Any qualifying exigency (as the
Secretary of Labor shall, by regulation,
determine) arising out of the fact that the
spouse, or a son, daughter, or parent of the
employee is a member of the Armed
Forces (including the National Guard and
Reserves) who is on covered active duty
(or has been notified of an impending call
or order to covered active duty).

(f) Caring for a covered service mem-
ber with a serious injury or illness if the
employee is the spouse, son, daughter,
parent, or next of kin of the service
member.

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The FMLA purposes are the purposes
for which an employee may take leave
under the FMLA. The terms used in this
Q&A-8 have the same meaning as defined
in section 825.102 of the FMLA regula-
tions, 29 CFR § 825.102.

Question 9: Under what circumstances is
paid leave considered family and medical
leave under section 45S?

Answer 9: Other than the narrow excep-
tion described in Q&A-10, paid leave
made available to an employee is consid-
ered family and medical leave under sec-
tion 45S only if the leave is specifically
designated for one or more FMLA pur-
poses, may not be used for any other rea-
son, and is not paid by a State or local
government or required by State or local
law. See also Q&A-21.

Example 1. Facts: Employer's written policy
provides six weeks of annual paid leave for the birth
of an employee's child, and to care for that child (an
FMLA purpose). The leave may not be used for any
other reason. No paid leave is provided by a State or
local government or required by State or local law.

Conclusion: Employer's policy provides six
weeks of family and medical leave under section
45S.

Example 2. Facts: Employer's written policy
provides three weeks of annual paid leave that is
specifically designated for any FMLA purpose and
may not be used for any other reason. No paid leave
is provided by a State or local government or re-
quired by State or local law.

Conclusion: Employer's policy provides three
weeks of family and medical leave under section
45S.

Example 3. Facts: Employer's written policy
provides three weeks of annual paid leave for any of
the following reasons: FMLA purposes, minor ill-
ness, vacation, or specified personal reasons. No paid
leave is provided by a State or local government or
required by State or local law.

Conclusion: Employer's policy does not provide
family and medical leave under section 45S because
the leave is not specifically designated for one or
more FMLA purposes and can be used for reasons
other than FMLA purposes. This is true even if an
employee uses the leave for an FMLA purpose.

Question 10: What is the consequence
under section 45S if an employer's written
policy provides paid leave that otherwise
would be specifically designated for an
FMLA purpose (for example, to care for a
spouse, child, or parent who has a serious
medical condition), except for the fact that
the leave is available to care for additional

individuals not specified in the FMLA (for
example, a grandchild, or grandparent
who has a serious medical condition)?
Answer 10: In this limited circumstance,
the fact that the leave could also be used
to care for additional individuals for
whom care under the FMLA purpose is
not required does not prevent the leave
from being considered specifically desig-
nated for an FMLA purpose. However,
the employer may not claim the credit
for any leave taken to care for an indi-
vidual other than a qualifying employ-
ee's spouse, parent, or child. See also
Q&A-28.

Example. Facts: Employer's written policy pro-
vides four weeks of annual paid leave to care for
family members with a serious health condition. The
policy's definition of "family members" includes the
individuals specified in the FMLA (spouse, children,
and parents), and also includes grandparents, grand-
children, and domestic partners. Employee uses one
week of annual paid leave to care for her grand-
mother, and at a later time, uses one week of annual
paid leave to care for her son.

Conclusion: Employer's policy provides paid
leave specifically designated for an FMLA purpose.
Although the paid leave taken by Employee to care
for her grandmother is not family and medical leave
under section 45S, and Employer may not claim the
credit for this leave, the paid leave taken by Em-
ployee to care for her son is family and medical
leave under section 45S for which Employer may
claim the credit, assuming all other requirements for
the credit are met.

Question 11: May paid leave provided
pursuant to an employer's short-term dis-
ability program be characterized as family
and medical leave under section 45S?

Answer 11: Yes. Paid leave provided un-
der an employer's short-term disability
program, whether self-insured by an em-
ployer or provided through a short-term
disability insurance policy, may be char-
acterized as family and medical leave un-
der section 45S if it otherwise meets the
requirements to be family and medical
leave under section 45S. See Q&A-9 and
Q&A-15.

## C. MINIMUM PAID LEAVE REQUIREMENTS

For an employer to be eligible to claim
the credit, an employer's written policy
must meet certain minimum requirements

with respect to paid family and medical
leave, as described in section 45S(c)(1)
and (c)(2). These requirements are:

(1) the policy must provide at least two
weeks of annual paid family and medical
leave to all qualifying employees who are
not part-time employees, and at least a
proportionate amount of paid family and
medical leave to qualifying employees
who are part-time employees,

(2) the policy must require a rate of
payment that is not less than 50 percent of
the wages normally paid to the qualifying
employee for services performed for the
employer, and

(3) if the employer employs one or
more qualifying employees who are not
covered by title I of the FMLA, the em-
ployer's written policy also must include
the "non-interference" language described
in Q&A-3.

Under section 45S(c)(4), any leave that
is paid by a State or local government or
required by State or local law is not taken
into account for any purpose in determin-
ing the amount of paid family and medical
leave provided by the employer.

Question 12: Who is a qualifying em-
ployee?

Answer 12: A qualifying employee is an
employee (as defined in section 3(e) of the
Fair Labor Standards Act of 1938, as
amended (FLSA)) who has been employed
by the employer for one year or more, and
whose compensation for the preceding year
does not exceed an amount equal to 60
percent of the amount applicable for that
year under section 414(q)(1)(B)(i).3 For
2017, the applicable amount of compensa-
tion under section 414(q)(1)(B)(i) is
$120,000.4 Accordingly, to be a qualifying
employee in 2018, an employee must have
earned no more than $72,000 (60 percent of
$120,000) in compensation in 2017 (or if
applicable, in the employer's fiscal year be-
ginning in 2017). Section 414(q)(4) pro-
vides that an employee's compensation is
determined under section 415(c)(3).

Question 13: How does an employer de-
termine whether an employee has been
employed for one year or more?

Answer 13: Until further guidance is is-

3While the "preceding year" used for this purpose is generally the preceding calendar year, an employer whose fiscal year is not the calendar year may choose to use as the "preceding year"
either (a) the employer's immediately preceding fiscal year, or (b) the calendar year ending in the employer's immediately preceding fiscal year.

4See Notice 2016-62, 2016-46 IRB 725. Each year, the IRS adjusts the applicable amount under section 414(q)(1)(B)(i) (and amounts under other Code sections) and publishes the adjusted
amounts in a notice. The applicable amount under section 414(q)(1)(B)(i) for 2018 is $120,000. See Notice 2017-64, 2017-45 IRB 486.

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sued, an employer may use any reasonable
method to determine whether an em-
ployee has been employed for one year or
more. Treating employees as employed
for one year or more if they have been
employed for 12 months, as set forth in
section 825.110(b) of the FMLA regula-
tions, 29 CFR § 825.110(b), is an example
of a reasonable method. However, any
requirement that an employee work 12
consecutive months to be a qualifying em-
ployee would not be viewed as a reason-
able method for determining whether an
employee has been employed for one
year.

Question 14: Must an employee work a
minimum number of hours per year to be
a qualifying employee?

Answer 14: No. Section 45S does not
require an employee to work a minimum
number of hours per year to be a qualify-
ing employee. Until further guidance is
issued, any requirement that an employee
work a minimum number of hours to be a
qualifying employee would not be viewed
as a reasonable method for determining
whether an employee has been employed
for one year. The rules under section
101(2)(A)(ii) of title I of the FMLA,
which require an employee to work a min-
imum of 1,250 hours of service to be an
eligible employee under the FMLA, do
not apply to section 45S.

Question 15: May the employer's written
policy exclude any classification of em-
ployees from eligibility for paid family
and medical leave?

Answer 15: No. An employer's written
policy must provide at least two weeks of
annual paid family and medical leave to
all qualifying employees who are not part-
time employees, and at least a proportion-
ate amount of annual paid family and
medical leave to all qualifying employees
who are part-time employees. The policy
may not exclude any classification of em-
ployees (for example, collectively bar-
gained employees) if they are qualifying
employees.

Example 1. Facts: Employer has an insured
short-term disability plan that provides disability
benefits to any employee who becomes disabled
after having completed six months of continuous
service. Under the plan, a disability caused by, or
resulting from, a pre-existing condition is not cov-

ered if the disability begins in the first 12 months
after the effective date of coverage. For purposes of
the plan, a pre-existing condition is one for which an
employee consulted a physician, received medical
treatment, or took prescribed drugs in the three
months immediately prior to the effective date of
coverage. The exclusion from coverage for pre-
existing conditions applies to all employees of the
employer during the applicable 12-month period.

Conclusion: Employees subject to the pre-
existing condition exclusion are effectively not cov-
ered under the plan when they first become qualify-
ing employees. In addition, in some cases, the
requirement that an employee complete six months
of continuous service might exclude some qualifying
employees. Therefore, the plan will not in all cases
cover all qualifying employees, and Employer may
not claim the credit under section 45S for paid fam-
ily and medical leave provided under the written
policy with respect to any employees.

Example 2. Facts: Same facts as in Example 1,
except that Employer adopts a written policy that
provides for paid leave to any qualifying employee
who is not covered under the short-term disability
plan as a result of the six months of service require-
ment or the pre-existing condition exclusion. This
leave is paid from Employer's general assets and the
length of the paid leave is the same as the leave that
would have been available under the short-term dis-
ability plan if neither the six months of service
requirement nor the pre-existing condition exclusion
applied to a qualifying employee.

Conclusion: Taking into account the leave avail-
able under Employer's insured short-term disability
plan and Employer's supplemental self-insured paid
leave arrangement as permitted under Q&A-4, Em-
ployer's written policy does not exclude any classi-
fication of qualifying employees and, assuming all
other requirements for the credit are met, Employer
may claim the credit under section 45S for paid
family and medical leave provided under the written
policy.

Question 16: How many weeks of annual
paid family and medical leave must an
employer provide to qualifying employees
to claim the credit under section 45S?
Answer 16: An employer's written policy
must provide qualifying employees who
are not part-time employees with at least
two weeks of annual paid family and med-
ical leave and must provide at least a
proportionate amount of annual paid fam-
ily and medical leave to qualifying em-
ployees who are part-time employees. For
part-time employees, the paid leave ratio
must be at least equal to the ratio of the
expected weekly hours worked by a qual-
ifying employee who is a part-time em-
ployee to the expected weekly hours
worked by an equivalent qualifying em-
ployee who is not a part-time employee,

as described in section 45S(c)(1)(A)(ii). In
determining the amount of paid family
and medical leave provided by the em-
ployer for purposes of section 45S, any
leave paid by a State or local government
or required by State or local law is not
taken into account.

Example. Facts: Employer's written policy pro-
vides four weeks of annual paid family and medical
leave to any qualifying employee expected to work
40 hours per week, and two weeks of paid family and
medical leave to any equivalent qualifying employee
who is a part-time employee and is expected to work
20 hours per week. All of Employer's employees
work either 20 or 40 hours per week.

Conclusion: Employer's policy meets the mini-
mum paid leave requirements because each em-
ployee who is not a part-time employee may take at
least the minimum two weeks of annual paid leave
and each part-time employee may take at least a
proportionate number of weeks of leave. Specifi-
cally, with respect to the proportionate amount, the
ratio of expected weekly hours worked by a quali-
fying employee who is a part-time employee (20
hours) to the expected weekly hours worked by an
equivalent qualifying employee who is not a part-
time employee (40 hours) is 1:2, and the policy
provides two weeks of paid leave to qualifying em-
ployees who are part-time employees and four weeks
of paid leave to equivalent qualifying employees
who are not part-time employees, satisfying the 1:2
ratio.

Question 17: How does an employer de-
termine who is a part-time employee?

Answer 17: A part-time employee is an
employee who is customarily employed
for fewer than 30 hours per week.5 Until
further guidance is issued, an employer
may use any reasonable method to deter-
mine how many hours an employee custom-
arily works per week for the employer. Rea-
sonable methods include the methods set
forth in 29 CFR § 2530.200b-2 for calcu-
lating hours of service in connection with
certain plans, such as qualified pension
plans, subject to the Employee Retirement
Income Security Act of 1974, as amended.
Question 18: What rate of payment must
an employer's written policy provide?

Answer 18: The employer's written pol-
icy must provide that each qualifying em-
ployee who is on paid family and medical
leave will be paid at least 50 percent of the
wages normally paid to the employee for
services performed for the employer. In
determining the rate of payment under the
policy, leave paid by a State or local gov-

5Section 45S(c)(1)(A)(i) uses the definition of part-time employee set forth in section 4980E(d)(4)(B), which states that a part-time time employee is any employee who is customarily
employed for fewer than 30 hours per week.

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ernment or required under State or local
law is not taken into account. See Q&A-21.
Question 19: For this purpose, how does
an employer determine the wages nor-
mally paid to an employee?

Answer 19: Wages normally paid to an
employee means the wages normally paid
to the employee for services performed
for the employer. Overtime (other than
regularly-scheduled overtime) and discre-
tionary bonuses are excluded from wages
normally paid. Until further guidance is
issued, for employees who are paid (in
whole or in part) on a basis other than a
salaried or hourly rate, an employer must
determine wages normally paid to the em-
ployee using the rules for determining
regular rate of pay set forth in regulations
issued under the FLSA. See 29 CFR
§ 778.109.

Question 20: Must the rate of payment or
period of paid family and medical leave
provided under an employer's written pol-
icy be uniform with respect to all qualify-
ing employees and for all FMLA pur-
poses?

Answer 20: No. Section 45S does not
require an employer's rate of payment or
period of paid family and medical leave to
be uniform with respect to all qualifying
employees and for all FMLA purposes.
However, to the extent an employer's pol-
icy provides different rates of payment or
periods of paid family and medical leave
for different FMLA purposes, the mini-
mum paid leave requirements must be sat-
isfied with respect to each FMLA purpose
for which the employer intends to claim
the credit. Conversely, if an employer's
policy provides a uniform rate of payment
and period of paid family and medical
leave for all qualifying employees and for
all FMLA purposes (or a uniform rate of
payment and period for several specified
FMLA purposes), the policy as a whole
must satisfy the minimum paid leave re-
quirements, and it is not necessary for the
minimum paid leave requirements to be
satisfied separately with respect to each
FMLA purpose.

Example 1. Facts: Employer's written policy
provides each qualifying employee with six weeks of
annual paid leave for the birth or adoption of the
employee's child, or to care for that child (an FMLA
purpose) at a rate of payment of 100 percent of
wages normally paid to the employee for services
performed for Employer. For all other FMLA pur-
poses, the policy provides each qualifying employee

with two weeks of annual paid leave at a rate of
payment of 75 percent of wages normally paid to the
employee.

Conclusion: Employer's written policy satisfies
the minimum paid leave requirements.

Example 2. Facts: Employer's written policy
provides each qualifying employee with two weeks
of annual paid leave for the birth or adoption of the
employee's child, or to care for that child (an FMLA
purpose) at a rate of payment of 100 percent of
wages normally paid to the employee, and also pro-
vides each qualifying employee who is not covered
by a collective bargaining agreement with two weeks
of annual paid leave for a serious health condition
that makes the employee unable to perform the du-
ties of his or her position (also an FMLA purpose) at
a rate of payment of 100 percent of wages normally
paid to the employee.

Conclusion: The portion of Employer's policy
that provides paid leave to each qualifying employee
for the birth or adoption of the employee's child, or
to care for that child, satisfies the minimum paid
leave requirements. However, the portion of the pol-
icy providing only certain qualifying employees
(those who are not covered by a collective bargain-
ing agreement) with paid leave for a serious health
condition that makes the employee unable to per-
form the duties of his or her position does not satisfy
the minimum paid leave requirements, and Employer
may not claim the credit for any leave taken under
that portion of the policy.

Example 3. Facts: Employer's written policy
provides each qualifying employee with two weeks
of annual paid leave for any FMLA purpose at a rate
of payment of 100 percent of the wages normally
paid to the employee, and each qualifying employee
who has 10 years of service with an additional two
weeks of annual paid leave for any FMLA purpose at
a rate of payment of 100 percent of wages normally
paid to the employee.

Conclusion: Employer's policy satisfies the min-
imum paid leave requirements.

Question 21: In determining the rate of
payment under the employer's written
policy, is leave paid by a State or local
government or required by State or local
law taken into account?

Answer 21: No. Leave paid by a State or
local government or required by State or
local law is not taken into account in
determining whether an employer's writ-
ten policy provides a rate of payment of at
least 50 percent of the wages normally
paid to an employee for services per-
formed for the employer. To be eligible to
claim the credit, an employer must inde-
pendently satisfy the minimum paid leave
requirements, including providing a rate
of payment of at least 50 percent of wages
normally paid to an employee. See also
Q&A-9.

Example 1. Facts: Under State law, an employee
on family and medical leave is eligible to receive six
weeks of benefits paid by a State insurance fund at a
rate of 50 percent of the employee's normal wages.

Additionally, Employer's written policy concur-
rently provides each qualifying employee with six
weeks of annual paid family and medical leave at a
rate of payment of 30 percent of the wages normally
paid to the employee for services performed for
Employer. Consequently, in the aggregate, a quali-
fying employee can receive six weeks of annual paid
family and medical leave at a rate of payment of 80
percent of the wages normally paid to the employee.

Conclusion: Employer's policy does not inde-
pendently satisfy the requirement that the rate of
payment be at least 50 percent of the wages normally
paid to an employee.

Example 2. Facts: Same facts as Example 1,
except that Employer's written policy provides each
qualifying employee with six weeks of annual paid
family and medical leave at a rate of payment of 50
percent of the wages normally paid to the employee
that runs concurrently with the State leave. Conse-
quently, in the aggregate, a qualifying employee can
receive six weeks of annual paid family and medical
leave at a rate of payment of 100 percent of the
wages normally paid to the employee.

Conclusion: Employer's policy independently
satisfies the requirement that the rate of payment be
at least 50 percent of the wages normally paid to an
employee. Only wages paid under Employer's writ-
ten policy (50 percent of wages normally paid to the
employee) may be used in calculating the credit.
Wages paid pursuant to State law are not used in
calculating the credit. See Q&A-26.

Example 3. Facts: Under State law, employers
are required to provide employees six weeks of fam-
ily and medical leave, and the State law permits this
leave to be either paid or unpaid. Employer's written
policy provides each qualifying employee with six
weeks of annual paid family and medical leave at a
rate of payment of 50 percent of the wages normally
paid to the employee.

Conclusion: Employer's policy independently
satisfies the requirement that the rate of payment be
at least 50 percent of the wages normally paid to an
employee.

## D. CALCULATING AND CLAIMING THE CREDIT

Section 45S(a)(1) provides that, in the
case of an eligible employer, the credit is
an amount equal to the applicable percent-
age of the amount of wages paid to qual-
ifying employees during any period in
which the employees are on family and
medical leave. Under section 45S(a)(2),
the term "applicable percentage" means
12.5 percent increased (but not above 25
percent) by 0.25 percentage points for
each percentage point by which the rate of
payment exceeds 50 percent.

Under section 45S(b)(3), the amount of
family and medical leave that may be
taken into account with respect to any
qualifying employee for any taxable year
may not exceed 12 weeks. Section
45S(b)(1) provides that the credit with

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respect to any qualifying employee for
any taxable year cannot exceed an amount
equal to the product of the employee's
normal hourly wage rate for each hour (or
fraction thereof) of actual services per-
formed for the employer and the number
of hours (or fraction thereof) for which
family and medical leave is taken.

Question 22: How is the applicable per-
centage calculated?

Answer 22: The applicable percentage is
based on the rate of payment for the leave
under the employer's policy. The base
applicable percentage of 12.5 percent ap-
plies if the rate of payment is 50 percent.
If the rate of payment under the policy is
greater than 50 percent, the applicable
percentage is increased by 0.25 percent-
age points for each percentage point by
which the rate of payment exceeds 50
percent, up to a maximum applicable per-
centage of 25 percent.

Example 1. Facts: Employer's written policy
provides each qualifying employee with four weeks
of annual paid family and medical leave at a rate of
payment of 75 percent of the wages normally paid to
the employee.

Conclusion: Because the rate of payment under
the policy exceeds 50 percent by 25 percentage
points, the base applicable percentage of 12.5 per-
cent is increased by 6.25 percent (.25 percent mul-
tiplied by 25), for an applicable percentage of 18.75
percent.

Applicable Percentage = 12.5 percent + (0.25 per-
cent x 25)
= 12.5 percent + 6.25

percent

= 18.75 percent

Example 2. Facts: Same facts as Example 1,
except that Employer's written policy provides each
qualifying employee who has at least 10 years of
service a rate of payment of 100 percent of the wages
normally paid to the employee for services per-
formed by the employer, rather than 75 percent.

Conclusion: Because the rate of payment for a
qualifying employee who has at least 10 years of
service is 100 percent (which is 50 percentage points
greater than 50) the base applicable percentage for
these employees is increased by 12.5 percent (0.25
percent multiplied by the 50). The applicable per-
centage with respect to such an employee is there-
fore 25 percent (the base percentage of 12.5 percent,
plus 12.5 percent). For a qualifying employee who
has less than 10 years of service, the applicable
percentage is the same as determined in Example 1.

Calculation for employee who has at least 10
years of service:

Applicable Percentage = 12.5 percent + (0.25 per-
cent x 50)

= 12.5 percent + 12.5
percent

= 25 percent

Question 23: How is the credit calcu-
lated?

Answer 23: The credit is equal to the
applicable percentage of the amount of
wages normally paid to a qualifying em-
ployee during any period (up to 12 weeks)
that the employee is on family and medi-
cal leave.

Example 1. Facts: Employer's written policy
provides each qualifying employee with four weeks
of annual paid family and medical leave at a rate of
payment of 75 percent of wages normally paid to the
employee. During 2018, Employee takes four weeks
of leave under the policy. Employee is normally paid
$1,000 per week. Employer pays Employee a total of
$3,000 ($750 per week for four weeks) for family
and medical leave under section 45S.

Conclusion: Assuming all the requirements for
the credit are met, Employer may claim a credit of
$562.50 with respect to Employee (18.75 percent of
$3,000).

Example 2. Facts: Same facts as Example 1,
except that Employer's written policy provides each
qualifying employee who has at least 10 years of
service with a rate of payment of 100 percent of the
wages normally paid to the employee. During 2018,
Employee A, who has been employed for 12 years,
takes leave under the policy for four weeks, and
Employee B, who has been employed for five years,
takes leave under the policy for two weeks. Both
Employee A and Employee B are normally paid
$1,000 per week. Employer pays Employee A a total
of $4,000, and Employee B a total of $1,500, for
family and medical leave under section 45S.

Conclusion: Assuming all the requirements for
the credit are met, Employer may claim a total credit
of $1,281.25 with respect to Employee A and Em-
ployee B. The credit for Employee A is $1,000 (25
percent of $4,000), and the credit for Employee B is
$281.25 (18.75 percent of $1,500).

Question 24: What are wages for pur-
poses of section 45S?

Answer 24: For purposes of section 45S,
pursuant to section 45S(g), the term
"wages" has the same meaning given to
that term by section 3306(b) (regarding
FUTA wages), determined without regard
to the $7,000 FUTA wage limitation. Sec-
tion 3306(b) generally defines wages as
all remuneration for employment, as de-
fined by section 3306(c), subject to certain
limitations. However, for purposes of sec-
tion 45S, the term "wages" does not in-
clude any amount taken into account for
purposes of determining any other credit
allowed under section 38, which provides
for several separate business-related cred-
its.

Example 1. Facts: Employer pays wages to Em-
ployee that qualify as a research expense for pur-
poses of determining the amount of Employer's re-
search credit under section 41(a). The research credit
under section 41(a) is a general business credit al-
lowed under section 38. Some of the wages paid to
Employee for the performance of qualified services

under section 41(b) were paid while Employee was
on family and medical leave.

Conclusion: For purposes of determining the
amount of Employer's credit under section 45S, Em-
ployer must exclude from the wages paid while
Employee was on family and medical leave any
wages treated as a qualified research expense for
purposes of determining the amount of Employer's
research credit under section 41(a).

Example 2. Facts: Employer is tax-exempt under
section 501(a) as an educational organization de-
scribed in section 501(c)(3). Employment with Em-
ployer is not employment for purposes of FUTA tax
pursuant to section 3306(c)(8); thus, compensation
paid by Employer is not FUTA wages within the
meaning of section 3306(b). Although Employer is
exempt from federal income tax under section
501(a), it earns unrelated business taxable income
from a trade or business that is not substantially
related to the performance of Employer's exempt
purpose. Employer maintains a written paid leave
policy that provides at least two weeks of paid fam-
ily and medical leave to all qualifying employees,
including those performing services for the unrelated
trade or business. Employer would like to claim the
credit against its unrelated business income tax lia-
bility.

Conclusion: Because Employer does not pay
FUTA wages within the meaning of section 3306(b),
compensation paid by Employer does not constitute
wages for purposes of section 45S(g). Consequently,
amounts paid by Employer to its employees while on
paid family and medical leave are not eligible for the
credit.

Question 25: Are wages paid by a third-
party payer (including an insurance com-
pany, a professional employer organiza-
tion, or a Certified Professional Employer
Organization) to qualifying employees for
services performed for an eligible em-
ployer considered wages for purposes of
section 45S?

Answer 25: Yes. However, only the eligi-
ble employer, and not the third-party
payer, may take into account wages paid
to qualifying employees for services per-
formed for the eligible employer in deter-
mining the credit under section 45S.

Question 26: Is leave paid by a State or
local government or required by a State or
local law taken into account in determin-
ing the credit?

Answer 26: No. Leave paid by a State or
local government or required by a State or
local law is not taken into account in
determining the credit.

Question 27: Are wages paid through an
employer's short-term disability program
for family and medical leave taken into
account in determining the credit?

Answer 27: Yes. Wages paid through an
employer's short-term disability program
for family and medical leave are taken
into account in determining the credit pro-

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vided that the program (in combination
with any other employer-paid leave ar-
rangement) meets the minimum paid
leave requirements. See Q&A-11.

Question 28: May an employer claim the
credit with respect to an employee who is
not a qualifying employee when the paid
family and medical leave is taken, but
who becomes a qualifying employee at a
later time during the taxable year?

Answer 28: No. An eligible employer
may claim the credit only with respect to
wages paid to an employee who is a qual-
ifying employee at the time family and
medical leave is taken. Wages paid to an
employee for family and medical leave
taken before an employee becomes a qual-
ifying employee are excluded in determin-
ing the employer's credit. However, if an
employer's written policy provides that
employees may take paid family and med-
ical leave before they become qualifying
employees and does not provide a dedi-
cated amount of leave meeting the mini-
mum paid leave requirements that may
only be taken after an employee becomes
a qualifying employee, the leave will not
fail to (a) be specifically designated for an
FMLA purpose, or (b) meet the minimum
paid leave requirements, solely because an
employee may take paid leave before be-
coming a qualifying employee.

Example. Facts: Employer's written policy pro-
vides all employees who have completed at least six
months of employment with four weeks of annual
paid family and medical leave at a rate of payment of
100 percent of wages normally paid to the employee
for services performed by the employer. Employee
completes six months of employment with employer
as of January 1, 2019, and one year of employment
(becoming a qualifying employee) as of July 1,
2019. On June 15, 2019, Employee begins a four
week period of paid family and medical leave under
the policy.

Conclusion: Assuming all the requirements to
claim the credit are met, Employer may use wages
paid to Employee for family and medical leave on or
after July 1, 2019, the date that Employee becomes a
qualifying employee, in the calculation of the credit.
Wages paid for family and medical leave taken be-
fore Employee becomes a qualifying employee are
not eligible for the credit.

Question 29: Who may claim the credit?
Answer 29: Only an eligible employer for
whom qualifying employees perform ser-
vices may claim the credit with respect to
wages paid. See also Q&A-25.

Question 30: Does claiming the credit
affect an employer's deduction for wages
or salaries paid for the taxable year?

Answer 30: Yes. Section 280C denies a
deduction for wages or salaries paid for
the taxable year equal to the amount of the
credit. Under section 280C(a), an employ-
er's deduction for wages paid is reduced
by an amount equal to the amount of the
credit.

Question 31: How does an eligible em-
ployer claim the credit?

Answer 31: An eligible employer must
file IRS Form 8994, Employer Credit for
Paid Family and Medical Leave, and IRS
Form 3800, General Business Credit, with
its tax return to claim the credit.

Question 32: For purposes of the limita-
tion described in section 45S(b)(1), how
does an employer determine the normal
hourly wage rate of an employee who is
not paid an hourly wage rate?

Answer 32: Until further guidance is is-
sued, an employer may use any reasonable
method to convert the normal wages paid
to an employee who is not paid an hourly
wage rate to an hourly rate.

Question 33: Are employers aggregated
under section 45S for purposes of calcu-
lating the credit?

Answer 33: No. Section 45S(c)(3) pro-
vides that all persons who are treated as a
single employer under section 52(a) and
(b) are treated as a single taxpayer. In
accordance with this aggregation rule, em-
ployers are aggregated for purposes of
section 45S(h)(1), which provides that a
taxpayer may elect to have section 45S
not apply for any taxable year. This is the
only purpose for which employers are
aggregated under section 45S. Conse-
quently, employers are not aggregated for
any other purpose under section 45S, in-
cluding calculating the credit as set forth
in this Section D.

Question 34: Does each member of a
controlled group of corporations (as de-
fined in section 52(a)) and each member
of a group of businesses under common
control (as defined in section 52(b)) gen-
erally make a separate election to claim or
not to claim the credit under section
45S(h)?

Answer 34: Yes. Each member of a con-
trolled group of corporations and each
member of a group of businesses under
common control generally makes a sepa-
rate election to claim or not to claim the
credit in accordance with rules set forth
under section 51(j)(2) and (3). However,

in the case of a consolidated group (as
defined in § 1.1502-1(h)), the election
is made by the agent (as defined in
§ 1.1502-77) of the group. An election to
claim or not to claim the credit is made for
the taxable year in which the credit is
available by claiming or not claiming the
credit on either an original return or an
amended return filed for that taxable year.
See Q&A 31.

## E. EFFECTIVE DATE

This notice is effective as of September
24, 2018, and applies to wages paid in
taxable years beginning after December
31, 2017, and before January 1, 2020.

## PUBLIC COMMENTS

This notice generally provides guid-
ance that the Treasury Department and the
IRS intend to incorporate into proposed
regulations. The proposed regulations will
provide interested parties an opportunity to
comment on the issues addressed in the pro-
posed regulations. However, to assist in de-
velopment of the proposed regulations, the
Treasury Department and the IRS request
comments on the guidance provided in this
notice. Public comments should be submit-
ted no later than November 23, 2018. Com-
ments should include a reference to Notice
2018-71. Send submissions to CC:PA:
LPD:PR (Notice 2018-71), Room 5203, In-
ternal Revenue Service, P.O. Box 7604, Ben
Franklin Station, Washington, DC 20044.
Submissions may be hand-delivered Mon-
day through Friday between the hours of 8
a.m. and 4 p.m. to CC:PA:LPD:PR (Notice
2018-71), Courier's Desk, Internal Reve-
nue Service, 1111 Constitution Avenue,
NW, Washington, DC 20044, or sent elec-
tronically, via the following e-mail address:
Notice.comments@irscounsel.treas.gov.
Please include "Notice 2018-71" in the
subject line of any electronic communica-
tion. All material submitted will be available
for public inspection and copying.

## PAPERWORK REDUCTION ACT

The collection of information con-
tained in this notice will be submitted
through IRS Form 8944 to the Office of
Management and Budget (OMB) in accor-
dance with the Paperwork Reduction Act
of 1995 (44 U.S.C. 3507(d)). An agency
may not conduct or sponsor, and a person

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is not required to respond to, a collection of
information unless the collection of infor-
mation displays a valid OMB control num-
ber. The collection of information is re-
quired to obtain a general business credit for
employers that provide paid family and
medical leave. The likely respondents are
individuals, households, businesses, and
other for-profit or not-for-profit institutions.
Books or records relating to a collection of
information must be retained as long as their
contents may become material in the admin-
istration of any internal revenue law. Gen-
erally, tax returns and tax return information
are confidential, as required by section
6103.

## DRAFTING INFORMATION

The principal author of this notice is
Dara Alderman of the Office of Associate
Chief Counsel (Tax Exempt and Govern-
ment Entities). For further information re-
garding this notice contact Dara Alderman
at (202) 317-5500 (not a toll-free num-
ber).

## Guidance under Section 132(g) for the Exclusion from Income of Qualified Moving Expense Reimbursements

### Notice 2018-75

#### PURPOSE

This notice provides guidance on the
application of section 132(g)(2) of the In-
ternal Revenue Code (Code) to employer
reimbursements in a taxable year begin-
ning after December 31, 2017, for quali-
fied moving expenses incurred in connec-
tion with a move that occurred prior to
January 1, 2018. Specifically, this notice
provides that the suspension of the exclu-
sion from income provided by section
132(a)(6) under section 132(g)(2) does
not apply to amounts received directly or
indirectly by an individual in 2018 from
an employer for expenses incurred in con-

nection with a move occurring prior to
January 1, 2018, that would have been
deductible as moving expenses under sec-
tion 217 of the Code if they had been
paid directly by the individual prior to
January 1, 2018, and that otherwise
satisfy the requirements under section
132(g)(1). Such amounts will be quali-
fied moving expense reimbursements
under section 132(g)(1) that are exclud-
able under section 132(a)(6).

## BACKGROUND

Section 132(a)(6) provides that gross in-
come does not include qualified moving ex-
pense reimbursements. Section 132(g)(1)
defines a "qualified moving expense reim-
bursement" as any amount directly or indi-
rectly received by an individual from an
employer as payment for (or a reimburse-
ment of) expenses which would be deduct-
ible as moving expenses under section 217
if such expenses were directly paid or in-
curred by the individual. The term qualified
moving expense reimbursement does not in-
clude any payment for (or reimbursement
of) an expense that was actually deducted
by the individual in a prior taxable year.
Qualified moving expense reimbursements
are also excludable from wages and compen-
sation for employment tax purposes. See sec-
tions 3121(a)(20), 3231(e)(5), 3306(b)(16),
and 3401(a)(19).

Section 11048(a) of the Tax Cuts and
Jobs Act, Pub. L. No. 115-97, 131 Stat.
2054, 2088 (2017) (the "Act"), amended
section 132(g) by adding paragraph
132(g)(2). Section 132(g)(2) provides
that section 132(a)(6) does not apply to
taxable years beginning after December
31, 2017, and before January 1, 2026,
except in the case of a member of the
Armed Forces of the United States on
active duty who moves pursuant to a
military order and incident to a perma-
nent change of station. Section 11048(b)
of the Act provides that this amendment
applies to taxable years beginning after
December 31, 2017.6

The Internal Revenue Service (IRS)
and the Department of the Treasury (Trea-

sury Department) have received questions
concerning the applicability of section
132(a)(6) to payments or reimbursements
received after December 31, 2017, for ex-
penses resulting from moves that occurred
prior to January 1, 2018.7 Specifically, the
questions concern the following two situ-
ations:

(1) An employer pays a third party
moving service provider after December
31, 2017, for moving services provided to
an individual prior to January 1, 2018; or

(2) An employer reimburses an indi-
vidual after December 31, 2017, for ex-
penses incurred in connection with a
move by the individual prior to January 1,
2018.

In inquiring whether, with respect to
employment-related moves occurring
in 2017, the change made by section
132(g)(2) prohibits an exclusion from
income for payments for moving ser-
vices made to third parties or reimburse-
ments for moving services made to in-
dividuals on or after January 1, 2018,
stakeholders noted that given the time of
the year when the TCJA was passed,
individuals who relocated in 2017 but
who did not receive payment or reim-
bursement until 2018 would not have
anticipated that the expected payment or
reimbursement could become taxable if
received in 2018 rather than 2017.

## DISCUSSION

The exclusion from income provided
in section 132(g)(1) applies if, among
other things, the expenses being paid or
reimbursed (1) would be deductible under
section 217 if directly paid or incurred by
the individual, and (2) the expenses were
not deducted by the individual. Section
11048(b) of the Act, providing the effec-
tive date for the suspension of the exclu-
sion from income for qualified moving
expense reimbursements, does not specify
whether the suspension applies to all pay-
ments or reimbursements received after
December 31, 2017, irrespective of when
the move occurred, or, alternatively, only
to payments or reimbursements for ex-

6Similarly, section 11049(a) of the Act enacted section 217(k), which suspended the deduction for certain moving expenses provided by section 217 of the Code for any taxable year beginning
after December 31, 2017, and before January 1, 2026, except for individuals who are members of the Armed Forces of the United States on active duty and meet the requirements of section
217(g).

7Since individual taxpayers generally have the calendar year as their taxable year and employers report income and wages to employees on a calendar year basis, as a practical matter, section
132(g)(2) is generally effective on January 1, 2018. Accordingly, this notice generally refers to moving expenses paid or incurred in 2017 and payments or reimbursements received in 2018.

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penses incurred for moves that occurred
after December 31, 2017.

This notice provides that the suspension
of the exclusion in section 132(a)(6) applies
only to payments or reimbursements for ex-
penses incurred in connection with moves
that occurred after December 31, 2017.
Thus, if an individual moved in 2017 and
the expenses for the move would have been
deductible by the individual under section
217 as in effect prior to the amendments
made by the Act if they had been paid
directly by the individual in 2017, and the
individual did not deduct the moving ex-
penses, then the amount received (directly
or indirectly) in 2018 by the individual from
an employer as payment for or reimburse-
ment of the expenses will be a qualified
moving expense reimbursement under sec-

tion 132(g)(1). As such, the payment or re-
imbursement of the expenses is excludable
from income as a qualified moving expense
reimbursement under section 132(a)(6), and
the amount is both excludable from wages
under sections 3121(a)(20), 3306(b)(16),
and 3401(a)(19) and excludable from com-
pensation under section 3231(e)(5).8

Employers that have included such
amounts in individuals' wages or compen-
sation for purposes of federal employment
taxes and have withheld and paid federal
employment taxes on these amounts may
use the adjustment process under section
6413 or the refund claim process under sec-
tion 6402 to correct the overpayment of
federal employment taxes on these amounts
(for information on these adjustment and
refund claim processes see the regulations

under these sections, Rev. Rul. 2009-39,
2009-52 I.R.B. 951 (2009), Publication 15
(Circular E), Employer's Tax Guide, and
the Instructions for Form 941-X, Adjusted
Employer's QUARTERLY Federal Tax
Return or Claim for Refund).

## DRAFTING INFORMATION

The principal author of this notice is
Andrew K. Holubeck, Office of Associate
Chief Counsel (Tax Exempt and Govern-
ment Entities). However, other personnel
from the Treasury Department and the
IRS participated in its development. For
further information regarding this notice,
contact Mr. Holubeck at (202) 317-4774
(not a toll-free number).

8Some of the employer payments covered by this Notice may also be excludable from the general definition of "compensation" under section 3231(e).

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## Part IV. Items of General Interest

## Notice of Proposed Rulemaking Additional First Year Depreciation Deduction REG-104397-18

AGENCY: Internal Revenue Service
(IRS), Treasury.

ACTION: Notice of proposed rulemaking.

SUMMARY: This document contains
proposed regulations that provide guid-
ance regarding the additional first year
depreciation deduction under section
168(k) of the Internal Revenue Code
(Code). These proposed regulations re-
flect changes made by the Tax Cuts and
Jobs Act. These proposed regulations af-
fect taxpayers who deduct depreciation
for qualified property acquired and placed
in service after September 27, 2017.

DATES: Written or electronic comments
and requests for a public hearing must be
received by October 9, 2018.

ADDRESSES: Send submissions to: CC:
PA:LPD:PR (REG-104397-18), Room
5203, Internal Revenue Service, P.O.
Box 7604, Ben Franklin Station, Wash-
ington, DC 20044. Submissions may be
hand-delivered Monday through Friday
between the hours of 8 a.m. and 4 p.m.
to CC:PA:LPD:PR (REG-104397-18),
Courier's Desk, Internal Revenue Ser-
vice, 1111 Constitution Avenue, NW.,
Washington, DC 20224, or sent elec-
tronically via the Federal eRulemaking
Portal at http://www.regulations.gov
(IRS REG-104397-18).

FOR FURTHER INFORMATION CON-
TACT: Concerning the proposed regula-
tions, Elizabeth R. Binder, (202) 317-7005;
concerning submissions of comments or re-
quests for a public hearing, Regina L. John-
son, (202) 317-6901 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

### Background

This document contains proposed
amendments to 26 CFR part 1 under sec-
tion 168(k). Section 168(k) was added to

the Code by section 101 of the Job Cre-
ation and Worker Assistance Act of 2002,
Public Law 107-147 (116 Stat. 21). Sec-
tion 168(k) allows an additional first year
depreciation deduction in the placed-in-
service year of qualified property. Subse-
quent amendments to section 168(k) in-
creased the percentage of the additional
first year depreciation deduction from 30
percent to 50 percent (to 100 percent for
property acquired and placed in service
after September 8, 2010, and generally
before January 1, 2012), extended the
placed-in-service date generally through
December 31, 2019, and made other
changes. See section 201 of the Jobs and
Growth Tax Relief Reconciliation Act of
2003, Public Law 108-27 (117 Stat. 752),
sections 403 and 408 of the Working
Families Tax Relief Act of 2004, Public
Law 108-311 (118 Stat. 1166), sections
336 and 337 of the American Jobs Cre-
ation Act of 2004, Public Law 108-357
(118 Stat. 1418), sections 403 and 405 of
the Gulf Opportunity Zone Act of 2005,
Public Law 109-135 (119 Stat. 2577),
section 103 of the Economic Stimulus Act
of 2008, Public Law 110-185 (122 Stat.
613), section 3081 of the Housing Assis-
tance Tax Act of 2008, Public Law 110-
289 (122 Stat. 2654), section 1201 of the
American Recovery and Reinvestment
Tax Act of 2009, Public Law 111-5 (123
Stat. 115), section 2022 of the Small Busi-
ness Jobs Act of 2010, Public Law 111-
240 (124 Stat. 2504), section 401 of the
Tax Relief, Unemployment Insurance Re-
authorization, and Job Creation Act of
2010, Public Law 111-312 (124 Stat.
3296), section 331 of the American Tax-
payer Relief Act of 2012, Public Law
112-240 (126 Stat. 2313), sections 125,
202, 210, 212, and 214 of the Tax Increase
Prevention Act of 2014, Public Law 113-
295 (128 Stat. 4010), and section 143 of
the Protecting Americans from Tax Hikes
Act of 2015, enacted as Division Q of the
Consolidated Appropriations Act, 2016,
Public Law 114-113 (129 Stat. 2242).

On December 22, 2017, section 168(k)
and related provisions were amended by
sections 12001(b)(13), 13201, and 13204
of the Tax Cuts and Jobs Act, Public Law
115-97 (131 Stat. 2054) (the "Act") to
provide further changes to the additional

first year depreciation deduction. Unless
otherwise indicated, all references to sec-
tion 168(k) hereinafter are references to
section 168(k) as amended.

Section 167(a) allows as a depreciation
deduction a reasonable allowance for the
exhaustion, wear and tear, and obsoles-
cence of property used in a trade or busi-
ness or of property held for the production
of income. The depreciation deduction al-
lowable for tangible depreciable property
placed in service after 1986 generally is
determined under the Modified Acceler-
ated Cost Recovery System provided by
section 168 (MACRS property). The de-
preciation deduction allowable for com-
puter software that is placed in service
after August 10, 1993, and is not an am-
ortizable section 197 intangible, is deter-
mined under section 167(f)(1).

Section 168(k), prior to amendment by
the Act, allowed an additional first year
depreciation deduction for the placed-in-
service year equal to 50 percent of the
adjusted basis of qualified property. Qual-
ified property was defined in part as prop-
erty the original use of which begins with
the taxpayer.

Section 13201 of the Act made several
amendments to the allowance for addi-
tional first year depreciation deduction in
section 168(k). For example, the addi-
tional first year depreciation deduction
percentage is increased from 50 to 100
percent; the property eligible for the addi-
tional first year depreciation deduction is
expanded to include certain used depre-
ciable property and certain film, televi-
sion, or live theatrical productions; the
placed-in-service date is extended from
before January 1, 2020, to before January
1, 2027 (from before January 1, 2021, to
before January 1, 2028, for longer produc-
tion period property or certain aircraft
property described in section 168(k)(2)(B)
or (C)); and the date on which a specified
plant is planted or grafted by the taxpayer
is extended from before January 1, 2020,
to before January 1, 2027.

Section 168(k) allows a 100-percent
additional first year depreciation deduction
for qualified property acquired and placed in
service after September 27, 2017, and
placed in service before January 1, 2023
(before January 1, 2024, for longer produc-

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tion period property or certain aircraft prop-
erty described in section 168(k)(2)(B) or
(C)). If a taxpayer elects to apply section
168(k)(5), the 100-percent additional first
year depreciation deduction also is allowed
for a specified plant planted or grafted after
September 27, 2017, and before January 1,
2023. The 100-percent additional first year
depreciation deduction is decreased by 20
percent annually for qualified property
placed in service, or a specified plant
planted or grafted, after December 31, 2022
(after December 31, 2023, for longer pro-
duction period property or certain aircraft
property described in section 168(k)(2)(B)
or (C)).

Section 168(k)(2)(A), as amended by
the Act, defines "qualified property" as
meaning, in general, property (1) to which
section 168 applies that has a recovery
period of 20 years or less, which is com-
puter software as defined in section
167(f)(1)(B) for which a deduction is al-
lowable under section 167(a) without re-
gard to section 168(k), which is water
utility property, which is a qualified film or
television production as defined in section
181(d) for which a deduction would have
been allowable without regard to section
181(a)(2) or (g) or section 168(k), or which
is a qualified live theatrical production as
defined in section 181(e) for which a deduc-
tion would have been allowable without re-
gard to section 181(a)(2) or (g) or section
168(k); (2) the original use of which begins
with the taxpayer or the acquisition of which
by the taxpayer meets the requirements of
section 168(k)(2)(E)(ii); and (3) which is
placed in service by the taxpayer before
January 1, 2027. Section 168(k)(2)(E)(ii) re-
quires that the acquired property was not
used by the taxpayer at any time prior to
such acquisition and the acquisition of such
property meets the requirements of section
179(d)(2)(A), (B), and (C) and section
179(d)(3).

However, section 168(k)(2)(D) pro-
vides that qualified property does not in-
clude any property to which the alterna-
tive depreciation system under section
168(g) applies, determined without regard
to section 168(g)(7) (relating to election to
have the alternative depreciation system
apply), and after application of section
280F(b) (relating to listed property with
limited business use).

Section 13201(h) of the Act provides
the effective dates of the amendments to
section 168(k) made by section 13201 of
the Act. Except as provided in section
13201(h)(2) of the Act, section 13201(h)(1)
of the Act provides that these amendments
apply to property acquired and placed in
service after September 27, 2017. However,
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 Act repealed section 168(k)(4) (relat-
ing to the election to accelerate alternative
minimum tax credits in lieu of the addi-
tional first year depreciation deduction)
for taxable years beginning after Decem-
ber 31, 2017. Further, section 13204(a)(4)
(B)(ii) repealed section 168(k)(3) (relating
to qualified improvement property) for
property placed in service after December
31, 2017.

### Explanation of Provisions

The proposed regulations describe and
clarify the statutory requirements that
must be met for depreciable property to
qualify for the additional first year depreci-
ation deduction provided by section 168(k).
Further, the proposed regulations instruct
taxpayers how to determine the additional
first year depreciation deduction and the
amount of depreciation otherwise allowable
for this property. Because the Act made
substantial amendments to section 168(k),
the proposed regulations update 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 Septem-
ber 27, 2017, and make conforming amend-
ments to the existing regulations.

1\. Eligibility Requirements for
Additional First Year Depreciation
Deduction

The proposed regulations follow sec-
tion 168(k)(2), as amended by the Act,
and section 13201(h) of the Act to provide
that depreciable property must meet four
requirements to be qualified property.
These requirements are (1) the deprecia-
ble property must be of a specified type;
(2) the original use of the depreciable

property must commence with the tax-
payer or used depreciable property must
meet the acquisition requirements of sec-
tion 168(k)(2)(E)(ii); (3) the depreciable
property must be placed in service by the
taxpayer within a specified time period or
must be planted or grafted by the taxpayer
before a specified date; and (4) the depre-
ciable property must be acquired by the
taxpayer after September 27, 2017.

#### 2. Property of a Specified Type

##### A. Property Eligible for the Additional First Year Depreciation Deduction

The proposed regulations follow the
definition of qualified property in section
168(k)(2)(A)(i) and (k)(5) and provide
that qualified property must be one of the
following: (1) MACRS property that has a
recovery period of 20 years or less; (2)
computer software as defined in, and de-
preciated under, section 167(f)(1); (3) wa-
ter utility property as defined in section
168(e)(5) and depreciated under section
168; (4) a qualified film or television pro-
duction as defined in section 181(d) and
for which a deduction would have been
allowable under section 181 without re-
gard to section 181(a)(2) and (g) or sec-
tion 168(k); (5) a qualified live theatrical
production as defined in section 181(e)
and for which a deduction would have
been allowable under section 181 without
regard to section 181(a)(2) and (g) or sec-
tion 168(k); or (6) a specified plant as
defined in section 168(k)(5)(B) and for
which the taxpayer has made an election
to apply section 168(k)(5). Qualified im-
provement property acquired after Sep-
tember 27, 2017, and placed in service
after September 27, 2017, and before Jan-
uary 1, 2018, also is qualified property.

For property placed in service after De-
cember 31, 2017, section 13204 of the Act
amended section 168(e) to eliminate the
15-year MACRS property classification
for qualified leasehold improvement prop-
erty, qualified restaurant property, and
qualified retail improvement property, and
amended section 168(k) to eliminate qual-
ified improvement property as a specific
category of qualified property. Because of
the effective date of section 13204 of the
Act (property placed in service after De-
cember 31, 2017), the proposed regula-

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tions provide that MACRS property with
a recovery period of 20 years or less in-
cludes the following MACRS property
that is acquired by the taxpayer after Sep-
tember 27, 2017, and placed in service by
the taxpayer after September 27, 2017,
and before January 1, 2018: (1) Qualified
leasehold improvement property; (2) qual-
ified restaurant property that is qualified
improvement property; and (3) qualified
retail improvement property. For the same
reason, the proposed regulations provide
that qualified property includes qualified
improvement property that is acquired by
the taxpayer after September 27, 2017,
and placed in service by the taxpayer after
September 27, 2017, and before January
1, 2018. Further, to account for the statu-
tory amendments to the definition of qual-
ified improvement property made by the
Act, the proposed regulations define qual-
ified improvement property for purposes
of section 168(k)(3) (before amendment
by section 13204 of the Act) and section
168(e)(6) (as amended by section 13204
of the Act).

For purposes of determining the eligi-
bility of MACRS property as qualified
property, the proposed regulations retain
the rule in § 1.168(k)-1(b)(2)(i)(A) that
the recovery period applicable for the
MACRS property under section 168(c) of
the general depreciation system (GDS) is
used, regardless of any election made by
the taxpayer to depreciate the class of
property under the alternative deprecia-
tion system of section 168(g) (ADS).

## B. Property Not Eligible for the Additional First Year Depreciation Deduction

The proposed regulations provide that
qualified property does not include (1)
property excluded from the application of
section 168 as a result of section 168(f);
(2) property that is required to be depre-
ciated under the ADS (as described be-
low); (3) any class of property for which
the taxpayer elects not to deduct the addi-
tional first year depreciation under section
168(k)(7); (4) a specified plant placed in
service by the taxpayer in the taxable year
and for which the taxpayer made an elec-
tion to apply section 168(k)(5) for a prior
year under section 168(k)(5)(D); (5) any
class of property for which the taxpayer

elects to apply section 168(k)(4) (this ex-
clusion applies to property placed in ser-
vice in any taxable year beginning before
January 1, 2018, because section 12001(b)
(13) of the Act repealed section 168(k)(4)
for taxable years beginning after Decem-
ber 31, 2017); or (6) property described in
section 168(k)(9)(A) or (B). Section
168(k)(9) provides that qualified property
does not include (A) any property that is
primarily used in a trade or business de-
scribed in section 163(j)(7)(A)(iv), or (B)
any property used in a trade or business
that has had floor plan financing indebt-
edness (as defined in section 163(j)(9)) if
the floor plan financing interest related to
such indebtedness was taken into account
under section 163(j)(1)(C). Section 163(j)
applies to taxable years beginning after
December 31, 2017. Accordingly, the ex-
clusion of property described in section
168(k)(9) from the additional first year
depreciation deduction applies to property
placed in service in any taxable year be-
ginning after December 31, 2017.

Property is required to be depreciated
under the ADS if the property is described
under section 168(g)(1)(A), (B), (C), (D),
(F), or (G) or if other provisions of the
Code require depreciation for the property
to be determined under the ADS. Accord-
ingly, MACRS property that is nonresi-
dential real property, residential rental prop-
erty, and qualified improvement property
held by an electing real property trade or
business (as defined in section 163(j)(7)
(B)), and property with a recovery period of
10 years or more that is held by an electing
farming business (as defined in section
163(j)(7)(C)), are not eligible for the addi-
tional first year depreciation deduction for
taxable years beginning after December 31,
2017. Pursuant to section 168(k)(2)(D),
MACRS property for which the taxpayer
makes an election under section 168(g)(7) to
depreciate the property under the ADS is
eligible for the additional first year depreci-
ation deduction (assuming all other require-
ments are met).

## C. Elections

The proposed regulations provide rules
for making the election out of the addi-
tional first year depreciation deduction
pursuant to section 168(k)(7) and for mak-
ing the election to apply section 168(k)(5)

to a specified plant. Additionally, the pro-
posed regulations provide rules for mak-
ing the election under section 168(k)(10)
to deduct 50 percent, instead of 100 per-
cent, additional first year depreciation for
qualified property acquired after Septem-
ber 27, 2017, by the taxpayer and placed
in service or planted or grafted, as appli-
cable, by the taxpayer during its taxable
year that includes September 28, 2017.
Because section 168(k)(10) does not state
that the election may be made "with respect
to any class of property" as stated in section
168(k)(7) for making the election out of the
additional first year depreciation deduction,
the proposed regulations provide that the
election under section 168(k)(10) applies to
all qualified property.

### 3. New and Used Property

#### A. New Property

The proposed regulations generally re-
tain the original use rules in § 1.168(k)-
1(b)(3). Pursuant to section 168(k)(2)
(A)(ii), the proposed regulations do not
provide any date by which the original use
of the property must commence with the
taxpayer. Because section 13201 of the
Act removed the rules regarding sale-
leaseback transactions, the proposed reg-
ulations also do not retain the original use
rules in § 1.168(k)-1(b)(3)(iii)(A) and (C)
regarding such transactions, including
a sale-leaseback transaction followed by a
syndication transaction. The rule in
the proposed regulations for syndication
transactions involving new or used prop-
erty is explained later in the preamble.

## B. Used Property

Pursuant to section 168(k)(2)(A)(ii)
and (k)(2)(E)(ii), the proposed regulations
provide that the acquisition of used prop-
erty is eligible for the additional first year
depreciation deduction if such acquisition
meets the following requirements: (1) The
property was not used by the taxpayer or a
predecessor at any time prior to the acqui-
sition; (2) the acquisition of the property
meets the related party and carryover ba-
sis requirements of section 179(d)(2)(A),
(B), and (C) and § 1.179-4(c)(1)(ii), (iii),
and (iv), or (c)(2); and (3) the acquisition
of the property meets the cost require-

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ments of section 179(d)(3) and § 1.179-
4(d).

## i. Section 336(e) Election

A section 338 election and a section
336(e) election share many of the same
characteristics. Therefore, the proposed reg-
ulations modify § 1.179-4(c)(2), which ad-
dresses the treatment of a section 338 elec-
tion, to include property deemed to have
been acquired by a new target corporation as
a result of a section 336(e) election. Section
1.336-1(a)(1) provides that to the extent not
inconsistent with section 336(e) or the reg-
ulations under section 336(e), the principles
of section 338 and the regulations under
section 338 apply for purposes of the regu-
lations under section 336. To the extent that
property is deemed to have been acquired
by a "new target corporation," the Treasury
Department and the IRS read § 1.179-
4(c)(2), without modification, as applying to
the deemed acquisition of property by a new
target corporation as a result of a section
336(e) election, just as it applies as the result
of a section 338 election. However, to re-
move any doubt, the proposed regulations
modify § 1.179-4(c)(2) to provide that
property deemed to have been acquired by a
new target corporation as a result of a sec-
tion 338 or a section 336(e) election will be
considered acquired by purchase for pur-
poses of section 179.

### ii. Property Not Previously Used By The Taxpayer

The proposed regulations provide that
the property is treated as used by the tax-
payer or a predecessor at any time before
its acquisition of the property only if the
taxpayer or the predecessor had a depre-
ciable interest in the property at any time
before the acquisition, whether or not the
taxpayer or the predecessor claimed de-
preciation deductions for the property. If a
lessee has a depreciable interest in the
improvements made to leased property
and subsequently the lessee acquires the
leased property of which the improve-
ments are a part, the proposed regulations
provide that the unadjusted depreciable
basis, as defined in § 1.168(b)-1(a)(3), of
the acquired property that is eligible for
the additional first year depreciation de-
duction, assuming all other requirements

are met, does not include the unadjusted
depreciable basis attributable to the im-
provements.

Further, if a taxpayer initially acquires
a depreciable interest in a portion of the
property and subsequently acquires an ad-
ditional depreciable interest in the same
property, the proposed regulations also
provide that such additional depreciable
interest is not treated as being previously
used by the taxpayer. However, if a tax-
payer holds a depreciable interest in a
portion of the property, sells that portion
or a part of that portion, and subsequently
acquires a depreciable interest in another
portion of the same property, the proposed
regulations provide that the taxpayer will
be treated as previously having a depre-
ciable interest in the property up to the
amount of the portion for which the tax-
payer held a depreciable interest in the
property before the sale.

The Treasury Department and the IRS
request comments on whether a safe har-
bor should be provided on how many tax-
able years a taxpayer or a predecessor should
look back to determine if the taxpayer or the
predecessor previously had a depreciable in-
terest in the property. Such comments should
provide the number of taxable years recom-
mended for the look-back period and the rea-
soning for such number.

## iii. Rules Applying to Consolidated Groups

Members of a consolidated group gen-
erally are treated as separate taxpayers.
See Woolford Realty Co. v. Rose, 286 U.S.
319, 328 (1932) ("[a] corporation does not
cease to be [a taxpayer] by affiliating with
another"). However, the Treasury Depart-
ment and the IRS believe that the addi-
tional first year depreciation deduction
should not be permitted to members of a
consolidated group when property is dis-
posed of by one member of a consolidated
group outside the group and subsequently
acquired by another member of the same
group because permitting such a deduc-
tion would not clearly reflect the group's
income tax liability. See section 1502
(permitting consolidated group regula-
tions different from the rules of chapter 1
of subtitle A of the Code otherwise appli-
cable to separate corporations to clearly
reflect the income tax liability of a con-

solidated group or each member of the
group). To implement this position, these
proposed regulations treat a member of a
consolidated group as previously having a
depreciable interest in all property in
which the consolidated group is treated as
previously having a depreciable interest.
For purposes of this rule, a consolidated
group will be treated as having a depre-
ciable interest in property if any current or
previous member of the group had a de-
preciable interest in the property while a
member of the group.

The Treasury Department and the IRS
also believe that the additional first year
depreciation deduction should not be al-
lowed when, as part of a series of related
transactions, one or more members of a
consolidated group acquire both the stock
of a corporation that previously had a de-
preciable interest in the property and the
property itself. Assume a corporation (the
selling corporation) has a depreciable in-
terest in property and sells it to an unre-
lated party. Subsequently, as part of a
series of related transactions, a member of
a consolidated group, unrelated to the sell-
ing corporation, acquires the property and
either that member or a different member
of the group acquires the stock of the
selling corporation. In substance, the se-
ries of transactions is the same as if the
selling corporation reacquired the prop-
erty and then transferred it to another
member of the group, in which case the
additional first year depreciation deduc-
tion would not be allowed. Accordingly,
these proposed regulations deny the de-
duction in such circumstances.

Additionally, if the acquisition of prop-
erty is part of a series of related transac-
tions that also includes one or more trans-
actions in which the transferee of the
property ceases to be a member of a con-
solidated group, then whether the taxpayer
is a member of a consolidated group is
tested immediately after the last transac-
tion in the series.

## iv. Series of Related Transactions

In determining whether property meets
the requirements of section 168(k)(2)
(E)(ii), the Treasury Department and the
IRS believe that the ordering of steps, or
the use of an unrelated intermediary, in a
series of related transactions should not

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control. For example, if a father buys and
places equipment in service for use in the
father's trade or business and subse-
quently the father sells the equipment to
his daughter for use in her trade or busi-
ness, the father and daughter are related
parties under section 179(d)(2)(A) and
§ 1.179-4(c)(1)(ii) and therefore, the
daughter's acquisition of the equipment is
not eligible for the additional first year
depreciation deduction. However, if in a
series of related transactions, the father
sells the equipment to an unrelated party
and then the unrelated party sells the
equipment to the father's daughter, the
daughter's acquisition of the equipment
from the unrelated party, absent the rule in
the proposed regulations, is eligible for
the additional first year depreciation de-
duction (assuming all other requirements
are met). Thus, the proposed regulations
provide that in the case of a series of
related transactions, the transfer of the
property will be treated as directly trans-
ferred from the original transferor to the
ultimate transferee, and the relation be-
tween the original transferor and the ulti-
mate transferee is tested immediately after
the last transaction in the series.

## C. Application to Partnerships

On September 8, 2003, the Treasury
Department and the IRS published tempo-
rary regulations (T.D. 9091, 2003-2 C.B.
939) in the Federal Register (68 FR
52986) relating to the additional first year
depreciation deduction provisions of sec-
tions 168(k) and 1400L(b) (before amend-
ment by sections 403 and 408 of the
Working Families Tax Relief Act of
2004). Those regulations provided that
any increase in the basis of qualified prop-
erty due to a section 754 election gener-
ally is not eligible for the additional first
year depreciation deduction. The pream-
ble to those regulations explained that any
increase in basis due to a section 754
election does not satisfy the original use
requirement. The final regulations (T.D.
9283, 2006-2 C.B. 633, 642-43) pub-
lished in the Federal Register on August
31, 2006 (71 FR 51738) retained the rule
for increases in basis due to section 754
elections at § 1.168(k)-1(f)(9). Because
the Act amended section 168(k) to allow
the additional first year depreciation de-

duction for certain used property in addi-
tion to new property, the Treasury Depart-
ment and the IRS have reconsidered
whether basis adjustments under sections
734(b) and 743(b) now qualify for the
additional first year depreciation deduc-
tion. The Treasury Department and the
IRS also have considered whether certain
section 704(c) adjustments as well as the
basis of distributed property determined
under section 732 should qualify for the
additional first year depreciation deduc-
tion.

## i. Section 704(c) Remedial Allocations

Section 1.704-3(d)(2) provides, in
part, that under the remedial allocation
method, the portion of a partnership's
book basis in contributed property that
exceeds its adjusted tax basis is recovered
using any recovery period and deprecia-
tion (or other cost recovery) method avail-
able to the partnership for newly pur-
chased property (of the same type as the
contributed property) that is placed in ser-
vice at the time of contribution. The pro-
posed regulations provide that remedial
allocations under section 704(c) do not
qualify for the additional first year depre-
ciation deduction under section 168(k).

Notwithstanding the language of
§ 1.704-3(d)(2) that any method avail-
able to the partnership for newly pur-
chased property may be used to recover
the portion of the partnership's book
basis in contributed property that ex-
ceeds its adjusted tax basis, remedial
allocations do not meet the requirements
of section 168(k)(2)(E)(ii). Because the
underlying property is contributed to the
partnership in a section 721 transaction,
the partnership's basis in the property is
determined by reference to the contrib-
uting partner's basis in the property,
which violates sections 179(d)(2)(C)
and 168(k)(2)(E)(ii)(II). In addition, the
partnership has already had a deprecia-
ble interest in the contributed property
at the time the remedial allocation is
made, which is in violation of section
168(k)(2)(E)(ii)(I) as well as the origi-
nal use requirement.

The same rule applies in the case of
revaluations of partnership property (re-
verse section 704(c) allocations).

## ii. Zero Basis Property

Section 1.704-1(b)(2)(iv)(g)(3) pro-
vides that, if partnership property has a
zero adjusted tax basis, any reasonable
method may be used to determine the
book depreciation, depletion, or amortiza-
tion of the property. The proposed regu-
lations provide that the additional first
year depreciation deduction under section
168(k) will not be allowed on property
contributed to the partnership with a zero
adjusted tax basis because, with the addi-
tional first year depreciation deduction,
the partners have the potential to shift
built-in gain among partners.

## iii. Basis Determined Under Section 732

Section 732(a)(1) provides that the ba-
sis of property (other than money) distrib-
uted by a partnership to a partner other
than in liquidation of the partner's interest
is its adjusted basis to the partnership im-
mediately before the distribution. Section
732(a)(2) provides that the basis deter-
mined under section 732(a)(1) shall not
exceed the adjusted basis of the partner's
interest in the partnership reduced by any
money distributed in the same transaction.
Section 732(b) provides that the basis of
property (other than money) distributed
by a partnership to a partner in liquidation
of the partner's interest is equal to the
adjusted basis of the partner's interest in
the partnership reduced by any money dis-
tributed in the same transaction.

Property distributed by a partnership to
a partner fails to satisfy the original use
requirement because the partnership used
the property prior to the distribution.
Distributed property also fails to satisfy
the acquisition requirements of section
168(k)(2)(E)(ii)(II). Any portion of basis
determined by section 732(a)(1) fails to
satisfy section 179(d)(2)(C) because it is
determined by reference to the partner-
ship's basis in the distributed property.
Similarly, any portion of basis determined
by section 732(a)(2) or (b) fails to satisfy
section 179(d)(3) because it is determined
by reference to the distributee partner's
basis in its partnership interest (reduced
by any money distributed in the same
transaction).

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## iv. Section 734(b) Adjustments

Section 734(b)(1) provides that, in the
case of a distribution of property to a
partner with respect to which a section
754 election is in effect (or when there is
a substantial basis reduction under section
734(d)), the partnership will increase the
adjusted basis of partnership property by
the sum of (A) the amount of any gain
recognized to the distributee partner under
section 731(a)(1), and (B) in the case of
distributed property to which section
732(a)(2) or (b) applies, the excess of the
adjusted basis of the distributed property
to the partnership immediately before
the distribution (as adjusted by section
732(d)) over the basis of the distributed
property to the distributee, as determined
under section 732.

Because a section 734(b) basis adjust-
ment is made to the basis of partnership
property (i.e., non-partner specific basis)
and the partnership used the property prior
to the partnership distribution giving rise
to the basis adjustment, a section 734(b)
basis adjustment fails the original use
clause in section 168(k)(2)(A)(ii) and also
fails the used property requirement in sec-
tion 168(k)(2)(E)(ii)(I). The proposed reg-
ulations therefore provide that section
734(b) basis adjustments are not eligible
for the additional first year depreciation
deduction.

## v. Section 743(b) Adjustments

Section 743(b)(1) provides that, in the
case of a transfer of a partnership interest,
either by sale or exchange or as a result of
the death of a partner, a partnership that
has a section 754 election in effect (or if
there is a substantial built-in loss immedi-
ately after such partnership interest trans-
fer under section 743(d)), will increase the
adjusted basis of partnership property by
the excess of the transferee's basis in the
transferred partnership interest over the
transferee's share of the adjusted basis of
partnership's property. This increase is an
adjustment to the basis of partnership
property with respect to the transferee
partner only and, therefore, is a partner
specific basis adjustment to partnership
property. The section 743(b) basis adjust-
ment is allocated among partnership prop-
erties under section 755. As stated above,

prior to the Act, a section 743(b) basis
adjustment would always fail the original
use requirement in section 168(k)(2)
(A)(ii) because partnership property to
which a section 743(b) basis adjustment
relates would have been previously used
by the partnership and its partners prior to
the transfer that gave rise to the section
743(b) adjustment. After the Act, while a
section 743(b) basis adjustment still fails
the original use clause in section 168(k)
(2)(A)(ii), a transaction giving rise to a
section 743(b) basis adjustment may sat-
isfy the used property clause in section
168(k)(2)(A)(ii) because of the used prop-
erty acquisition requirements of section
168(k)(2)(E)(ii), depending on the facts
and circumstances.

Because a section 743(b) basis adjust-
ment is a partner specific basis adjustment
to partnership property, the proposed reg-
ulations take an aggregate view and pro-
vide that, in determining whether a section
743(b) basis adjustment meets the used
property acquisition requirements of sec-
tion 168(k)(2)(E)(ii), each partner is
treated as having owned and used the part-
ner's proportionate share of partnership
property. In the case of a transfer of

a partnership interest, section 168(k)(2)
(E)(ii)(I) will be satisfied if the partner
acquiring the interest, or a predecessor of
such partner, has not used the portion of
the partnership property to which the sec-
tion 743(b) basis adjustment relates at any
time prior to the acquisition (that is, the
transferee has not used the transferor's
portion of partnership property prior to the
acquisition), notwithstanding the fact that
the partnership itself has previously used
the property. Similarly, for purposes of
applying section 179(d)(2)(A), (B), and
(C), the partner acquiring a partnership
interest is treated as acquiring a portion of
partnership property, and the partner who
is transferring a partnership interest is
treated as the person from whom the prop-
erty is acquired.

For example, the relationship between
the transferor partner and the transferee
partner must not be a prohibited relation-
ship under section 179(d)(2)(A). Also, the
transferor partner and transferee partner
may not be part of the same controlled
group under section 179(d)(2)(B). Finally,
the transferee partner's basis in the trans-
ferred partnership interest may not be de-

termined in whole or in part by reference
to the transferor's adjusted basis, or under
section 1014.

The same result will apply regardless
of whether the transferee partner is a new
partner or an existing partner purchasing
an additional partnership interest from an-
other partner. Assuming that the transferor
partner's specific interest in partnership
property that is acquired by the transferee
partner has not previously been used by
the transferee partner or a predecessor, the
corresponding section 743(b) basis adjust-
ment will be eligible for the additional
first year depreciation deduction in the
hands of the transferee partner, provided
all other requirements of section 168(k)
are satisfied (and assuming § 1.743-
1(j)(4)(i)(B)(2) does not apply). This
treatment is appropriate notwithstanding
the fact that the transferee partner may
have an existing interest in the underlying
partnership property, because the transfer-
ee's existing interest in the underlying
partnership property is distinct from the
interest being transferred.

Finally, the proposed regulations pro-
vide that a section 743(b) basis adjustment
in a class of property (not including the
property class for section 743(b) basis ad-
justments) may be recovered using the
additional first year depreciation deduc-
tion under section 168(k) without regard
to whether the partnership elects out of the
additional first year depreciation deduc-
tion under section 168(k)(7) for all other
qualified property in the same class of
property and placed in service in the same
taxable year. Similarly, a partnership may
make the election out of the additional
first year depreciation deduction under
section 168(k)(7) for a section 743(b) ba-
sis adjustment in a class of property (not
including the property class for section
743(b) basis adjustments), and this elec-
tion will not bind the partnership to such
election for all other qualified property of
the partnership in the same class of prop-
erty and placed in service in the same
taxable year.

## D. Syndication Transaction

The syndication transaction rule in the
proposed regulations is based on the rules
in section 168(k)(2)(E)(iii) for syndication
transactions. For new or used property,

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the proposed regulations provide that if
(1) a lessor has a depreciable interest in
the property and the lessor and any pre-
decessor did not previously have a depre-
ciable interest in the property, (2) the
property is sold by the lessor or any sub-
sequent purchaser within three months af-
ter the date the property was originally
placed in service by the lessor (or, in the
case of multiple units of property subject
to the same lease, within three months
after the date the final unit is placed in
service, so long as the period between the
time the first unit is placed in service and
the time the last unit is placed in service
does not exceed 12 months), and (3) the
user (lessee) of the property after the last
sale during the three-month period re-
mains the same as when the property was
originally placed in service by the lessor,
then the purchaser of the property in the
last sale during the three-month period is
considered the taxpayer that acquired the
property and the taxpayer that originally
placed the property in service, but not
earlier than the date of the last sale. Thus,
if a transaction is within the rules de-
scribed above, the purchaser of the prop-
erty in the last sale during the three-month
period is eligible to claim the additional
first year depreciation for the property (as-
suming all requirements are met), and the
earlier purchasers of the property are not.

### 4. Placed-in-Service Date

The proposed regulations generally re-
tain the placed-in-service date rules in
§ 1.168(k)-1(b)(5). Pursuant to the effec-
tive date in section 13201(h) of the Act
and section 168(k)(2)(A)(iii) and (k)(2)
(B)(i)(II), the proposed regulations pro-
vide that qualified property must be
placed in service by the taxpayer after
September 27, 2017, and before January
1, 2027, or, in the case of property de-
scribed in section 168(k)(2)(B) or (C),
before January 1, 2028. Because section
13201 of the Act removed the rules re-
garding sale-leaseback transactions, the
proposed regulations do not retain the
placed-in-service date rules in § 1.168(k)-
1(b)(5)(ii)(A) and (C) regarding such
transactions, including a sale-leaseback
transaction followed by a syndication
transaction.

Further, the proposed regulations pro-
vide rules for specified plants. Pursuant to
section 168(k)(5)(A), if the taxpayer
has made an election to apply section
168(k)(5) for a specified plant, the pro-
posed regulations provide that the speci-
fied plant must be planted before January
1, 2027, or grafted before January 1, 2027,
to a plant that has already been planted, by
the taxpayer in the ordinary course of the
taxpayer's farming business, as defined in
section 263A(e)(4).

Pursuant to section 168(k)(2)(H), the
proposed regulations also provide that a
qualified film or television production is
treated as placed in service at the time of
initial release or broadcast as defined un-
der § 1.181-1(a)(7), and a qualified live
theatrical production is treated as placed
in service at the time of the initial live
staged performance. The proposed regula-
tions also provide that the initial live
staged performance of a qualified live the-
atrical production is the first commercial
exhibition of a production to an audience.
An initial live staged performance does
not include limited exhibition, prior to
commercial exhibition to general audi-
ences, if the limited exhibition is primarily
for purposes of publicity, determining the
need for further production activity, or
raising funds for the completion of pro-
duction. For example, the initial live
staged performance does not include a
preview of the production if the preview is
primarily to determine the need for further
production activity.

### 5. Date of Acquisition

The proposed regulations provide rules
applicable to the acquisition requirements
of the effective date under section
13201(h) of the Act. The proposed regu-
lations provide that these rules apply to all
property, including self-constructed prop-
erty or property described in section
168(k)(2)(B) or (C).

## A. Written Binding Contract

Pursuant to section 13201(h)(1)(A) of
the Act, the proposed regulations provide
that the property must be acquired by the
taxpayer after September 27, 2017, or,
acquired by the taxpayer pursuant to a
written binding contract entered into by

the taxpayer after September 27, 2017.
Because of the clear language of section
13201(h)(1) of the Act regarding written
binding contracts, the proposed regula-
tions also provide that property that is
manufactured, constructed, or produced
for the taxpayer by another person under a
written binding contract that is entered
into prior to the manufacture, construc-
tion, or production of the property for use
by the taxpayer in its trade or business or
for its production of income is acquired
pursuant to a written binding contract.
Further, if the written binding contract
states the date on which the contract was
entered into and a closing date, delivery
date, or other similar date, the date on
which the contract was entered into is the
date the taxpayer acquired the property.
The proposed regulations retain the rules
in § 1.168(k)-1(b)(4)(ii) defining a bind-
ing contract. Additionally, the proposed
regulations provide that a letter of intent
for an acquisition is not a binding con-
tract.

## B. Self-Constructed Property

If a taxpayer manufactures, constructs,
or produces property for its own use, the
Treasury Department and the IRS recog-
nize that the written binding contract rule
in section 13201(h)(1) of the Act does not
apply. In such case, the proposed regula-
tions provide that the acquisition rules in
section 13201(h)(1) of the Act are treated
as met if the taxpayer begins manufactur-
ing, constructing, or producing the prop-
erty after September 27, 2017. The pro-
posed regulations provide rules similar to
those in § 1.168(k)-1(b)(4)(iii)(B) for de-
fining when manufacturing, construction,
or production begins, including the safe
harbor, and in § 1.168(k)-1(b)(4)(iii)(C)
for a contract to acquire, or for the man-
ufacture, construction, or production of, a
component of the larger self-constructed
property. As stated in the preceding para-
graph, these self-constructed rules in the
proposed regulations do not apply to prop-
erty that is manufactured, constructed, or
produced for the taxpayer by another per-
son under a written binding contract that
is entered into prior to the manufacture,
construction, or production of the prop-
erty.

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## C. Qualified Film, Television, or Live Theatrical Productions

The proposed regulations also provide
rules for qualified film, television, or live
theatrical productions. For purposes of
section 13201(h)(1)(A) of the Act, the
proposed regulations provide that a qual-
ified film or television production is
treated as acquired on the date principal
photography commences, and a qualified
live theatrical production is treated as ac-
quired on the date when all of the neces-
sary elements for producing the live the-
atrical production are secured. These
elements may include a script, financing,
actors, set, scenic and costume designs,
advertising agents, music, and lighting.

## D. Specified Plants

Pursuant to section 13201(h)(2) of the
Act, if the taxpayer makes an election to
apply section 168(k)(5) for a specified
plant, the proposed regulations provide
that the specified plant must be planted
after September 27, 2017, or grafted after
September 27, 2017, to a plant that has
already been planted, by the taxpayer in
the ordinary course of the taxpayer's
farming business, as defined in section
263A(e)(4).

## 6. Longer Production Period Property or Certain Aircraft Property

The proposed regulations provide rules
for determining when longer production
period property or certain aircraft property
described in section 168(k)(2)(B) or (C)
meets the acquisition requirements of sec-
tion 168(k)(2)(B)(i)(III) or (k)(2)(C)(i), as
applicable. Pursuant to section 168(k)(2)
(B)(i)(III) and (k)(2)(C)(i), the proposed
regulations provide that property de-
scribed in section 168(k)(2)(B) or (C)
must be acquired by the taxpayer before
January 1, 2027, or acquired by the tax-
payer pursuant to a written binding con-
tract that is entered into before January 1,
2027. These acquisition requirements are
in addition to those in section 13201(h)(1)
of the Act, which require acquisition to
occur after September 27, 2017.

The proposed regulations provide that
the written binding contract rules for lon-
ger production period property and certain

aircraft property are the same rules
that apply for purposes of determining
whether the acquisition requirements of
section 13201(h)(1) of the Act are met.

With respect to self-constructed prop-
erty described in section 168(k)(2)(B) or
(C), the proposed regulations follow the
acquisition rule in section 168(k)(2)(E)(i)
for self-constructed property and provide
that the acquisition requirements of sec-
tion 168(k)(2)(B)(i)(III) or (k)(2)(C)(i), as
applicable, are met if a taxpayer manufac-
tures, constructs, or produces the property
for its own use and such manufacturing,
construction, or productions begins before
January 1, 2027. Further, only for pur-
poses of section 168(k)(2)(B)(i)(III) and
(k)(2)(C)(i), the proposed regulations pro-
vide that property that is manufactured,
constructed, or produced for the taxpayer
by another person under a written binding
contract that is entered into prior to the
manufacture, construction, or produc-
tion of the property for use by the tax-
payer in its trade or business or for its
production of income is considered to be
manufactured, constructed, or produced
by the taxpayer. The proposed regula-
tions also provide rules similar to those
in § 1.168(k)-1(b)(4)(iii)(B) for defin-
ing when manufacturing, construction,
or production begins, including the
same safe harbor, and in § 1.168(k)-
1(b)(4)(iii)(C) for a contract to acquire,
or for the manufacture, construction, or
production of, a component of the larger
self-constructed property.

## 7. Computation of Additional First Year Depreciation Deduction and Otherwise Allowable Depreciation

Pursuant to section 168(k)(1)(A), the
proposed regulations provide that the al-
lowable additional first year depreciation
deduction for qualified property is equal
to the applicable percentage (as defined in
section 168(k)(6)) of the unadjusted depre-
ciable basis (as defined in § 1.168(b)-
1(a)(3)) of the property. For qualified prop-
erty described in section 168(k)(2)(B), the
unadjusted depreciable basis (as defined in
§ 1.168(b)-1(a)(3)) of the property is lim-
ited to the property's basis attributable to
manufacture, construction, or production of
the property before January 1, 2027, as pro-
vided in section 168(k)(2)(B)(ii).

Pursuant to section 168(k)(2)(G), the
proposed regulations also provide that the
additional first year depreciation deduc-
tion is allowed for both regular tax and
alternative minimum tax (AMT) pur-
poses. However, for AMT purposes, the
amount of the additional first year depre-
ciation deduction is based on the unad-
justed depreciable basis of the property
for AMT purposes. The amount of the
additional first year depreciation deduc-
tion is not affected by a taxable year of
less than 12 months for either regular or
AMT purposes.

The proposed regulations provide rules
similar to those in § 1.168(k)-1(d)(2) for
determining the amount of depreciation
otherwise allowable for qualified prop-
erty. That is, before determining the
amount of depreciation otherwise allow-
able for qualified property, the proposed
regulations require the taxpayer to first
reduce the unadjusted depreciable basis
(as defined in § 1.168(b)-1(a)(3)) of the
property by the amount of the additional
first year depreciation deduction allowed
or allowable, whichever is greater (the
remaining adjusted depreciable basis), as
provided in section 168(k)(1)(B). Then,
the remaining adjusted depreciable basis
is depreciated using the applicable depre-
ciation provisions of the Code for the
property (for example, section 168 for
MACRS property, section 167(f)(1)
for computer software, and section 167 for
film, television, or theatrical productions).
This amount of depreciation is allowed for
both regular tax and AMT purposes, and
is affected by a taxable year of less than
12 months. However, for AMT purposes,
the amount of depreciation allowed is de-
termined by calculating the remaining ad-
justed depreciable basis of the property
for AMT purposes and using the same
depreciation method, recovery period, and
convention that applies to the property for
regular tax purposes. If a taxpayer uses the
optional depreciation tables in Rev. Proc.
87-57 (1987-2 C.B. 687) to compute de-
preciation for qualified property that is
MACRS property, the proposed regula-
tions also provide that the remaining ad-
justed depreciable basis of the property is
the basis to which the annual depreciation
rates in those tables apply.

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## 8. Special Rules

The proposed regulations also provide
rules similar to those in § 1.168(k)-1(f)
for certain situations. However, the spe-
cial rules in § 1.168(k)-1(f)(9) regarding
the increase in basis due to a section 754
election are addressed in the proposed
regulations regarding the used property
acquisition requirements. Further, the spe-
cial rules in § 1.168(k)-1(f)(1)(iii) regard-
ing property placed in service and trans-
ferred in a section 168(i)(7) transaction in
the same taxable year, and in § 1.168(k)-
1(f)(5) regarding like-kind exchanges or
involuntary conversions, are updated to
reflect the used property acquisition re-
quirements in section 168(k)(2)(E)(ii).
The special rules in the proposed regula-
tions also are updated to reflect the appli-
cable dates under section 168(k), and the
changes by the Act to technical termina-
tions of partnerships and the rehabilitation
credit.

The proposed regulations provide rules
for the following situations: (1) Qualified
property placed in service or planted or
grafted, as applicable, and disposed of in
the same taxable year; (2) redetermination
of basis of qualified property; (3) recap-
ture of additional first year depreciation
for purposes of section 1245 and section
1250; (4) a certified pollution control fa-
cility that is qualified property; (5) like-
kind exchanges and involuntary conver-
sions of qualified property; (6) a change in
use of qualified property; (7) the compu-
tation of earnings and profits; (8) the in-
crease in the limitation of the amount of
depreciation for passenger automobiles;
(9) the rehabilitation credit under section
47; and (10) computation of depreciation
for purposes of section 514(a)(3).

The proposed regulations provide a
special rule for qualified property that is
placed in service in a taxable year and
then contributed to a partnership under
section 721(a) in the same taxable year
when one of the other partners previously
had a depreciable interest in the property.
Situation 1 of Rev. Rul. 99-5 (1999-1 C.B.
434) is an example of such a fact pattern.
Under § 1.168(k)-1(f)(1)(iii) and its cross-
reference to § 1.168(d)-1(b)(7)(ii), the ad-
ditional first year depreciation deduction as-
sociated with the contributed property
would be allocated between the contributing

partner and the partnership based on the
proportionate time the contributing partner
and the partnership held the property
throughout the taxable year. The partnership
could then allocate a portion of the deduc-
tion to the partner with a previous deprecia-
ble interest in the property. The Treasury
Department and the IRS believe that allo-
cating any portion of the deduction to a
partner who previously had a depreciable
interest in the property would be inconsis-
tent with section 168(k)(2)(E)(ii)(I). There-
fore, the proposed regulations provide that,
in this situation, the additional first year
depreciation deduction with respect to the
contributed property is not allocated under
the general rules of § 1.168(d)-1(b)(7)(ii).
Instead, the additional first year depreciation
deduction is allocated entirely to the contrib-
uting partner prior to the section 721(a)
transaction and not to the partnership.

With respect to like-kind exchanges
and involuntary conversions, § 1.168(k)-
1(f)(5) provides that the exchanged basis
and excess basis, if any, of the replace-
ment property is eligible for the additional
first year depreciation deduction if the re-
placement property is qualified property.
The proposed regulations retain this rule if
the replacement property also meets the
original use requirement. Pursuant to sec-
tion 168(k)(2)(E)(ii)(II) and its cross-
reference to section 179(d)(3), the pro-
posed regulations also provide that only
the excess basis, if any, of the replacement
property is eligible for the additional first
year depreciation deduction if the replace-
ment property is qualified property and
also meets the used property acquisition
requirements. These rules also apply when
a taxpayer makes the election under
§ 1.168(i)-6(i)(1) to treat, for deprecia-
tion purposes only, the total of the ex-
changed basis and excess basis, if any, in
the replacement MACRS property as prop-
erty placed in service by the taxpayer at the
time of replacement and the adjusted depre-
ciable basis of the relinquished MACRS
property as disposed of by the taxpayer at
the time of disposition. The proposed regu-
lations also retain the other rules in
§ 1.168(k)-1(f)(5) for like-kind exchanges
and involuntary conversions, but update the
definitions to be consistent with the defini-
tions in § 1.168(i)-6, which addresses how
to compute depreciation of property in-

volved in like-kind exchanges or involun-
tary conversions.

## Proposed Applicability Date

These regulations are proposed to ap-
ply to qualified property placed in service
or planted or grafted, as applicable, by the
taxpayer during or after the taxpayer's
taxable year that includes the date of pub-
lication of a Treasury decision adopting
these rules as final regulations in the Fed-
eral Register. Pending the issuance of the
final regulations, a taxpayer may choose
to apply these proposed regulations to
qualified property acquired and placed in
service or planted or grafted, as applica-
ble, after September 27, 2017, by the tax-
payer during taxable years ending on or
after September 28, 2017.

## Special Analyses

The Administrator of the Office of In-
formation and Regulatory Affairs (OIRA),
Office of Management and Budget, has
waived review of this proposed rule in
accordance with section 6(a)(3)(A) of Ex-
ecutive Order 12866. OIRA will subse-
quently make a significance determination
of the final rule, pursuant to section 3(f) of
Executive Order (EO) 12866 and the
April 11, 2018, Memorandum of Agree-
ment between the Department of Treasury
and the Office of Management and Budget
(OMB).

The proposed regulations do not im-
pose a collection of information on small
entities and provide clarifying rules for
taxpayers to enjoy the tax benefit of 100-
percent additional first year depreciation
as provided by the amendments to section
168 by the Act. Therefore, a regulatory
flexibility analysis is not required under
the Regulatory Flexibility Act (5 U.S.C.
chapter 6). Pursuant to section 7805(f) of
the Code, this notice of proposed rulemak-
ing will be submitted to the Chief Counsel
for Advocacy of the Small Business Ad-
ministration for comment on its impact on
small business.

## Comments and Requests for a Public Hearing

Before these proposed regulations are
adopted as final regulations, consideration
will be given to any comments that are
submitted timely to the IRS as prescribed

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in this preamble under the ADDRESSES
heading. The Treasury Department and
the IRS request comments on all aspects
of the proposed rules. All comments will
be available at http://www.regulations.gov
or upon request. A public hearing will be
scheduled if requested in writing by any
person that timely submits written com-
ments. If a public hearing is scheduled,
notice of the date, time, and place for the
public hearing will be published in the
Federal Register.

## Drafting Information

The principal authors of these pro-
posed regulations are Kathleen Reed and
Elizabeth R. Binder of the Office of As-
sociate Chief Counsel (Income Tax and
Accounting). However, other personnel
from the Treasury Department and the
IRS participated in their development.

## Statement of Availability

The IRS Revenue Procedures and Rev-
enue 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.

## List of Subjects in 26 CFR Part 1

Income taxes, Reporting and record-
keeping requirements.

## Proposed Amendments to the Regulations

Accordingly, 26 CFR part 1 is pro-
posed to be amended as follows:

## PART 1-INCOME TAXES

Paragraph 1. The authority citation for
part 1 is amended by adding an entry for
§ 1.168(k)-2 in numerical order to read
in part as follows:

Authority: 26 U.S.C. 7805

*****

Section 1.168(k)-2 also issued under
26 U.S.C. 1502.
*****

Par. 2. Section 1.48-12 is amended by:

1\. In the last sentence in paragraph
(a)(2)(i), removing "The last sentence"

and adding "The next to last sentence" in
its place;

2\. Adding two sentences at the end of
paragraph (a)(2)(i); and

3\. Adding a sentence to the end of
paragraph (c)(8)(i).

The additions read as follows:

§ 1.48-12 Qualified rehabilitated
building; expenditures incurred after
December 31, 1981.

(a) * * *

(2) * * *

(i) * * * The last sentence of paragraph
(c)(8)(i) of this section applies to qualified
rehabilitation expenditures that are quali-
fied property under section 168(k)(2) and
placed in service by a taxpayer during or
after the taxpayer's taxable year that in-
cludes the date of publication of a Trea-
sury decision adopting these rules as final
regulations in the Federal Register. How-
ever, a taxpayer may rely on the last sen-
tence in paragraph (c)(8)(i) of this section
in these proposed regulations for qualified
rehabilitation expenditures that are quali-
fied property under section 168(k)(2) and
acquired and placed in service after Sep-
tember 27, 2017, by the taxpayer during
taxable years ending on or after Septem-
ber 28, 2017, and ending before the tax-
payer's taxable year that includes the date
of publication of a Treasury decision
adopting these rules as final regulations in
the Federal Register.

* * * * *

(c) * * *

(8) * * *

(i) *** Further, see § 1.168(k)-2(f)(9)
if the qualified rehabilitation expenditures
are qualified property under section
168(k), as amended by the Tax Cuts and
Jobs Act, Public Law 115-97 (131 Stat.
2054 (December 22, 2017)).

* * * * *

Par. 3. Section 1.167(a)-14 is amended
by:

1\. In the third sentence in paragraph
(b)(1), removing "under section 168(k)(2)
or § 1.168(k)-1," and adding "under section
168(k)(2) and § 1.168(k)-1 or 1.168(k)-2,
as applicable," in its place;

2\. In the last sentence in paragraph
(e)(3), removing "and before 2010"; and
3\. Adding two sentences at the end of
paragraph (e)(3).

The addition reads as follows:

§ 1.167(a)-14 Treatment of certain in-
tangible property excluded from section
197.

** * * *

(e) * * *

(3) * * * The language "or
§ 1.168(k)-2, as applicable," in the third
sentence in paragraph (b)(1) of this sec-
tion applies to computer software that is
qualified property under section 168(k)(2)
and placed in service by a taxpayer during
or after the taxpayer's taxable year that
includes the date of publication of a Trea-
sury decision adopting these rules as final
regulations in the Federal Register. How-
ever, a taxpayer may rely on the language
"or § 1.168(k)-2, as applicable," in the
third sentence in paragraph (b)(1) of this
section in these proposed regulations for
computer software that is qualified prop-
erty under section 168(k)(2) and acquired
and placed in service after September 27,
2017, by the taxpayer during taxable years
ending on or after September 28, 2017,
and ending before the taxpayer's taxable
year that includes the date of publication
of a Treasury decision adopting these
rules as final regulations in the Federal
Register.

Par. 4. Section 1.168(b)-1 is amended
by adding paragraph (a)(5) and revising
paragraph (b) to read as follows:

§ 1.168(b)-1 Definitions.

(a) * * *

(5) Qualified improvement property-
(i) Is any improvement that is section
1250 property to an interior portion of a
building, as defined in § 1.48-1(e)(1), that
is nonresidential real property, as defined
in section 168(e)(2)(B), if the improve-
ment is placed in service by the taxpayer
after the date the building was first placed
in service by any person and if-

(A) For purposes of section 168(e)(6),
the improvement is placed in service by
the taxpayer after December 31, 2017;

(B) For purposes of section 168(k)(3)
as in effect on the day before amendment
by section 13204(a)(4)(B) of the Tax Cuts
and Jobs Act, Public Law 115-97 (131
Stat. 2054 (December 22, 2017)) ("Act"),
the improvement is acquired by the tax-
payer before September 28, 2017, the im-
provement is placed in service by the tax-

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payer before January 1, 2018, and the
improvement meets the original use re-
quirement in section 168(k)(2)(A)(ii) as in
effect on the day before amendment by
section 13201(c)(1) of the Act; or

(C) For purposes of section 168(k)(3)
as in effect on the day before amendment
by section 13204(a)(4)(B) of the Act, the
improvement is acquired by the taxpayer
after September 27, 2017; the improve-
ment is placed in service by the taxpayer
after September 27, 2017, and before Jan-
uary 1, 2018; and the improvement meets
the requirements in section 168(k)(2)
(A)(ii) as amended by section 13201(c)(1)
of the Act; and

(ii) Does not include any qualified im-
provement for which an expenditure is
attributable to-

(A) The enlargement, as defined in
§ 1.48-12(c)(10), of the building;

(B) Any elevator or escalator, as defined
in § 1.48-1(m)(2); or

(C) The internal structural framework,
as defined in § 1.48-12(b)(3)(iii), of the
building.

(b) Effective date-(1) In general. Ex-
cept as provided in paragraph (b)(2) of
this section, this section is applicable on
or after February 27, 2004.

(2) Application of paragraph (a)(5) of
this section-(i) In general. Except as
provided in paragraph (b)(2)(ii) of this
section, paragraph (a)(5) of this section is
applicable on or after the date of publica-
tion of a Treasury decision adopting these
rules as final regulations in the Federal
Register.

(ii) Early application of paragraph
(a)(5) of this section. A taxpayer may rely
on the provisions of paragraph (a)(5) of
this section in these proposed regulations
for the taxpayer's taxable years ending on
or after September 28, 2017, and ending
before the taxpayer's taxable year that in-
cludes the date of publication of a Trea-
sury decision adopting these rules as final
regulations in the Federal Register.

Par. 5. Section 1.168(d)-1 is amended
by:

1\. Adding a sentence at the end of para-
graph (b)(3)(ii);

2\. Adding a sentence at the end of para-
graph (b)(7)(ii); and

3\. Adding two sentences at the end of
paragraph (d)(2).

The additions read as follows:

§ 1.168(d)-1 Applicable conventions-
half-year and mid-quarter conventions.

* * * * *

(b) * * *

(3) * * *

(ii) * * * Further, see § 1.168(k)-
2(f)(1) for rules relating to qualified prop-
erty under section 168(k), as amended by
the Tax Cuts and Jobs Act, Public Law
115-97 (131 Stat. 2054 (December 22,
2017)), that is placed in service by the
taxpayer in the same taxable year in which
either a partnership is terminated as a re-
sult of a technical termination under sec-
tion 708(b)(1)(B) or the property is trans-
ferred in a transaction described in section
168(i)(7).

* * * * *

(7) * * *

(ii) * * * However, see § 1.168(k)-
2(f)(1)(iii) for a special rule regarding the
allocation of the additional first year de-
preciation deduction in the case of certain
contributions of property to a partnership
under section 721.

* * * * *

(d) * * *

(2) * * * The last sentences in para-
graphs (b)(3)(ii) and (b)(7)(ii) of this sec-
tion apply to qualified property under
section 168(k)(2) placed in service by a
taxpayer during or after the taxpayer's
taxable year that includes the date of pub-
lication of a Treasury decision adopting
these rules as final regulations in the Fed-
eral Register. However, a taxpayer may
rely on the last sentences in paragraphs
(b)(3)(ii) and (b)(7)(ii) of this section in
these proposed regulations for qualified
property under section 168(k)(2) acquired
and placed in service after September 27,
2017, by the taxpayer during taxable years
ending on or after September 28, 2017,
and ending before the taxpayer's taxable
year that includes the date of publication
of a Treasury decision adopting these
rules as final regulations in the Federal
Register.

* * * * *

Par. 6. Section 1.168(i)-4 is amended
by:

1\. In the penultimate sentence in para-
graph (b)(1), removing “§§ 1.168(k)-
1T(f)(6)(iii) and 1.1400L(b)-1T(f)(6)" and
adding "§ 1.168(k)-1(f)(6)(iii) or 1.168(k)-

2(f)(6)(iii), as applicable, and § 1.1400L(b)-
1(f)(6)" in its place;

2\. In the fifth sentence in paragraph
(c), removing "§§ 1.168(k)-1T(f)(6)(ii)
and 1.1400L(b)-1T(f)(6)" and adding
"§ 1.168(k)-1(f)(6)(ii) or 1.168(k)-2(f)(6)(ii),
as applicable, and § 1.1400L(b)-1(f)(6)" in its
place;

3\. In the second sentence in paragraph
(d)(3)(i)(C), removing “§§ 1.168(k)-1T(f)
(6)(iv) and 1.400L(b)-1T(f)(6)" and adding
"§ 1.168(k)-1(f)(6)(iv) or 1.168(k)-2(f)(6)
(iv), as applicable, and § 1.400L(b)-1(f)(6)"
in its place;

4\. In the last sentence in paragraph
(d)(4)(i), removing "§§ 1.168(k)-1T(f)(6)
(iv) and 1.1400L(b)-1T(f)(6)" and adding
"§ 1.168(k)-1(f)(6)(iv) or 1.168(k)-2(f)
(6)(iv), as applicable, and § 1.400L(b)-
1(f)(6)" in its place;

5\. Revising the first sentence in para-
graph (g)(1); and

6\. Redesignating paragraph (g)(2) as
paragraph (g)(3) and adding new para-
graph (g)(2).

The addition and revision read as follows:

§ 1.168(i)-4 Changes in use.

* * * * *

(g) * * *

(1) * * * Except as provided in para-
graph (g)(2) of this section, this section
applies to any change in the use of
MACRS property in a taxable year ending
on or after June 17, 2004.

(2) Qualified property under section
168(k) acquired and placed in service af-
ter September 27, 2017. The language "or
§ 1.168(k)-2(f)(6)(iii), as applicable" in
paragraph (b)(1) of this section, the lan-
guage "or § 1.168(k)-2(f)(6)(ii), as appli-
cable" in paragraph (c) of this section, and
the language "or § 1.168(k)-2(f)(6)(iv), as
applicable" in paragraphs (d)(3)(i)(C) and
(d)(4)(i) of this section applies to any
change in use of MACRS property, which
is qualified property under section
168(k)(2), by a taxpayer during or after
the taxpayer's taxable year that includes
the date of publication of a Treasury de-
cision adopting these rules as final regu-
lations in the Federal Register. However,
a taxpayer may rely on the language "or
§ 1.168(k)-2(f)(6)(iii), as applicable" in
paragraph (b)(1) of this section, the lan-
guage "or § 1.168(k)-2(f)(6)(ii), as appli-

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cable" in paragraph (c) of this section, and
the language "or § 1.168(k)-2(f)(6)(iv), as
applicable" in paragraphs (d)(3)(i)(C) and
(d)(4)(i) of this section in these proposed
regulations for any change in use of
MACRS property, which is qualified
property under section 168(k)(2) and ac-
quired and placed in service after Septem-
ber 27, 2017, by the taxpayer during tax-
able years ending on or after September
28, 2017, and ending before the taxpay-
er's taxable year that includes the date of
publication of a Treasury decision adopt-
ing these rules as final regulations in the

### Federal Register.

* * * * *

Par. 7. Section 1.168(i)-6 is amended
by:

1\. In paragraph (d)(3)(ii)(B), removing
"1.168(k)-1(f)(5) or § 1.1400L(b)-1(f)(5)"
wherever it appears and adding "1.168(k)-
1(f)(5), 1.168(k)-2(f)(5), or 1.1400L(b)-
1(f)(5)" in its place;

2\. In paragraph (d)(3)(ii)(E), removing
"1.168(k)-1(f)(5) or § 1.1400L(b)-1(f)(5)"
and adding "1.168(k)-1(f)(5), 1.168(k)-
2(f)(5), or 1.1400L(b)-1(f)(5)" in its place;

3\. Adding a sentence at the end of
paragraph (d)(4);

4\. Adding a sentence at the end of
paragraph (h); and

5\. Adding paragraph (k)(4).
The additions read as follows:

#### § 1.168(i)-6 Like-kind exchanges and involuntary conversions.

* * * * *

(d)

(4) * * * Further, see § 1.168(k)-
2(f)(5)(iv) for replacement MACRS prop-
erty that is qualified property under sec-
tion 168(k), as amended by the Tax Cuts
and Jobs Act, Public Law 115-97 (131
Stat. 2054 (December 22, 2017)).

* * * * *

(h) * * * Further, see § 1.168(k)-
2(f)(5) for qualified property under sec-
tion 168(k), as amended by the Tax Cuts
and Jobs Act, Public Law 115-97 (131
Stat. 2054 (December 22, 2017)).

* * * * *

(k)

(4) Qualified property under section
168(k) acquired and placed in service af-
ter September 27, 2017. The language
"1.168(k)-2(f)(5)," in paragraphs (d)(3)

(ii)(B) and (E) of this section and the last
sentences in paragraphs (d)(4) and (h) of
this section apply to a like-kind exchange
or an involuntary conversion of MACRS
property, which is qualified property un-
der section 168(k)(2), for which the time of
replacement occurs on or after the date of
publication of a Treasury decision adopting
these rules as final regulations in the Fed-
eral Register. However, a taxpayer may
rely on the language "1.168(k)-2(f)(5)," in
paragraphs (d)(3)(ii)(B) and (E) of this sec-
tion and the last sentences in paragraphs
(d)(4) and (h) of this section in these pro-
posed regulations for a like-kind exchange
or an involuntary conversion of MACRS
property, which is qualified property under
section 168(k)(2), for which the time of
replacement occurs on or after September
28, 2017, and occurs before the date of
publication of a Treasury decision adopting
these rules as final regulations in the Fed-
eral Register.

Par. 8. Section 1.168(k)-0 is amended
by revising the introductory text and add-
ing an entry for § 1.168(k)-2 in numerical
order to the table of contents to read as
follows:

§ 1.168(k)-0 Table of contents.

This section lists the major paragraphs
contained in §§ 1.168(k)-1 and 1.168(k)-2.
* * * * *

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

(a) Scope and definitions.

(1) Scope.

(2) Definitions.

(b) Qualified property.

(1) In general.

(2) Description of qualified property.

(i) In general.

(ii) Property not eligible for additional
first year depreciation deduction.

(3) Original use or used property ac-
quisition requirements.

(i) In general.

(ii) Original use.

(A) In general.

(B) Conversion to business or income-
producing use.

(C) Fractional interests in property.

(iii) Used property acquisition require-
ments.

(A) In general.

(B) Property was not used by the tax-
payer at any time prior to acquisition.

(C) Special rules for a series of related
transactions.

(iv) Application to partnerships.

(A) Section 704(c) remedial alloca-
tions.

(B) Basis determined under section
732.

(C) Section 734(b) adjustments.

(D) Section 743(b) adjustments.

(v) Syndication transaction.

(vi) Examples.

(4) Placed-in-service date.

(i) In general.

(ii) Specified plant.

(iii) Qualified film, television, or live
theatrical production.

(iv) Syndication transaction.

(v) Technical termination of a partner-
ship.

(vi) Section 168(i)(7) transactions.

(5) Acquisition of property.

(i) In general.

(ii) Acquisition date.

(iii) Definition of binding contract.

(A) In general.

(B) Conditions.

(C) Options.

(D) Letter of intent.

(E) Supply agreements.

(F) Components.

(iv) Self-constructed property.

(A) In general.

(B) When does manufacture, construc-
tion, or production begin.

(C) Components of self-constructed
property.

(v) Qualified film, television, or live
theatrical production.

(vi) Specified plant.

(vii) Examples.

(c) Property described in section
168(k)(2)(B) or (C).

(1) In general.

(2) Definition of binding contract.

(3) Self-constructed property.

(i) In general.

(ii) When does manufacture, construc-
tion, or production begin.

(A) In general.

(B) Safe harbor.

(iii) Components of self-constructed
property.

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(A) Acquired components.

(iv) Examples.

§ 1.168(k)-2 Additional first year

(B) Self-constructed components.

(2) Redetermination of basis.

depreciation deduction for property

(iv) Examples.

(i) Increase in basis.

acquired and placed in service after

(d) Computation of depreciation de-

(ii) Decrease in basis.

September 27, 2017.

duction for qualified property.

(iii) Definitions.

(1) Additional first year depreciation

(iv) Examples.

(a) Scope and definitions-(1) Scope.

deduction.

(3) Sections 1245 and 1250 deprecia-

This section provides rules for determin-

(i) Allowable taxable year.

tion recapture.

ing the additional first year depreciation

(ii) Computation.

(4) Coordination with section 169.

deduction allowable under section 168(k)

(iii) Property described in section

(5) Like-kind exchanges and involun-

for qualified property acquired and placed

168(k)(2)(B).

tary conversions.

in service after September 27, 2017.

(iv) Alternative minimum tax. (A) In general.

(i) Scope.

(2) Definitions. For purposes of this section-

(B) Special rules.

(ii) Definitions.

(i) Act is the Tax Cuts and Jobs Act,

(2) Otherwise allowable depreciation

(iii) Computation.

Public Law 115-97 (131 Stat. 2054 (De-

deduction.

(A) In general.

cember 22, 2017)); and

(i) In general.

(B) Year of disposition and year of

(ii) Applicable percentage is the per- centage provided in section 168(k)(6).

replacement.

(ii) Alternative minimum tax.

(3) Examples.

(C) Property described in section

(b) Qualified property-(1) In general.

(e) Elections under section 168(k).

168(k)(2)(B).

Qualified property is depreciable prop-

(1) Election not to deduct additional

(D) Effect of § 1.168(i)-6(i)(1) elec-

erty, as defined in § 1.168(b)-1(a)(1), that

first year depreciation.

tion.

meets all the following requirements in

(i) In general.

(E) Alternative minimum tax.

the first taxable year in which the property

(ii) Definition of class of property.

(iv) Replacement MACRS property or

is subject to depreciation by the taxpayer

(iii) Time and manner for making elec-

replacement computer software that is

whether or not depreciation deductions for

tion.

acquired and placed in service before

the property are allowable:

(A) Time for making election.

disposition of relinquished MACRS

(i) The requirements in § 1.168(k)-

(B) Manner of making election.

property or relinquished computer soft-

2(b)(2) (description of qualified property);

(iv) Failure to make election.

ware.

(ii) The requirements in § 1.168(k)-

(2) Election to apply section 168(k)(5)

(v) Examples.

2(b)(3) (original use or used property ac-

for specified plants.

(6) Change in use.

quisition requirements);

(i) In general.

(i) Change in use of depreciable prop-

(iii) The requirements in § 1.168(k)-

(ii) Time and manner for making elec-

erty.

2(b)(4) (placed-in-service date); and

tion.

(ii) Conversion to personal use.

(iv) The requirements in § 1.168(k)-

(A) Time for making election.

(iii) Conversion to business or income-

2(b)(5) (acquisition of property).

(B) Manner of making election.

producing use.

(2) Description of qualified property-

(iii) Failure to make election.

(A) During the same taxable year.

(i) In general. Depreciable property will

(3) Election for qualified property

(B) Subsequent to the acquisition year.

meet the requirements of this paragraph

placed in service during the 2017 tax-

(iv) Depreciable property changes use

(b)(2) if the property is-

able year.

subsequent to the placed-in-service

(A) MACRS property, as defined in

(i) In general.

year.

§ 1.168(b)-1(a)(2), that has a recovery

(ii) Time and manner for making elec-

(v) Examples.

period of 20 years or less. For purposes of

tion.

(7) Earnings and profits.

this paragraph (b)(2)(i)(A) and section

(A) Time for making election.

(8) Limitation of amount of deprecia-

168(k)(2)(A)(i)(I), the recovery period is

(B) Manner of making election.

determined in accordance with section

(iii) Failure to make election.

tion for certain passenger automobiles.

168(c) regardless of any election made by

(4) Alternative minimum tax.

(9) Coordination with section 47.

the taxpayer under section 168(g)(7). This

(5) Revocation of election.

(i) In general.

paragraph (b)(2)(i)(A) includes the fol-

(i) In general.

(ii) Example.

lowing MACRS property that is acquired

(ii) Automatic 6-month extension.

(10) Coordination with section 514(a)(3).

by the taxpayer after September 27, 2017,

(f) Special rules.

(g) Applicability dates.

and placed in service by the taxpayer after

(1) Property placed in service and dis-

(1) In general.

September 27, 2017, and before January

posed of in the same taxable year.

(2) Early application.

1,2018:

(i) In general.

Par. 9. Section 1.168(k)-2 is added to

(1) Qualified leasehold improvement

(ii) Technical termination of a partner- ship.

read as follows:

property as defined in section 168(e)(6) as in effect on the day before amendment by section 13204(a)(1) of the Act;

(iii) Section 168(i)(7) transactions.

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(2) Qualified restaurant property, as de-
fined in section 168(e)(7) as in effect on
the day before amendment by section
13204(a)(1) of the Act, that is qualified
improvement property as defined in
§ 1.168(b)-1(a)(5)(i)(C) and (a)(5)(ii);
and

(3) Qualified retail improvement prop-
erty as defined in section 168(e)(8) as in
effect on the day before amendment by
section 13204(a)(1) of the Act;

(B) Computer software as defined in,
and depreciated under, section 167(f)(1) and
the regulations under section 167(f)(1);

(C) Water utility property as defined in
section 168(e)(5) and depreciated under
section 168;

(D) Qualified improvement property as
defined in § 1.168(b)-1(a)(5)(i)(C) and
(a)(5)(ii) and depreciated under section
168;

(E) Qualified film or television produc-
tion, as defined in section 181(d) and
§ 1.181-3, for which a deduction would
have been allowable under section 181
without regard to section 181(a)(2) and
(g), or section 168(k);

(F) Qualified live theatrical production,
as defined in section 181(e), for which a
deduction would have been allowable un-
der section 181 without regard to section
181(a)(2) and (g), or section 168(k); or

(G) A specified plant, as defined in
section 168(k)(5)(B), for which the tax-
payer has properly made an election to
apply section 168(k)(5) for the taxable
year in which the specified plant is
planted, or grafted to a plant that has al-
ready been planted, by the taxpayer in the
ordinary course of the taxpayer's farming
business, as defined in section 263A(e)(4)
(for further guidance, see paragraph (e) of
this section).

(ii) Property not eligible for additional
first year depreciation deduction. Depre-
ciable property will not meet the require-
ments of this paragraph (b)(2) if the prop-
erty is-

(A) Described in section 168(f) (for
example, automobiles for which the tax-
payer uses the optional business standard
mileage rate);

(B) Required to be depreciated under
the alternative depreciation system of sec-
tion 168(g) pursuant to section 168(g)(1)
(A), (B), (C), (D), (F), or (G), or other
provisions of the Internal Revenue Code

(for example, property described in sec-
tion 263A(e)(2)(A) if the taxpayer or any
related person, as defined in section
263A(e)(2)(B), has made an election un-
der section 263A(d)(3), or property de-
scribed in section 280F(b)(1));

(C) Included in any class of property
for which the taxpayer elects not to deduct
the additional first year depreciation (for
further guidance, see paragraph (e) of this
section);

(D) A specified plant that is placed in
service by the taxpayer during the taxable
year and for which the taxpayer made an
election to apply section 168(k)(5) for a
prior taxable year;

(E) Included in any class of property
for which the taxpayer elects to apply
section 168(k)(4). This paragraph (b)(2)
(ii)(E) applies to property placed in ser-
vice in any taxable year beginning before
January 1, 2018;

(F) Described in section 168(k)(9)(A)
and placed in service in any taxable year
beginning after December 31, 2017; or

(G) Described in section 168(k)(9)(B)
and placed in service in any taxable year
beginning after December 31, 2017.

(3) Original use or used property ac-
quisition requirements-(i) In general.
Depreciable property will meet the re-
quirements of this paragraph (b)(3) if the
property meets the original use require-
ments in paragraph (b)(3)(ii) of this sec-
tion or if the property meets the used
property acquisition requirements in para-
graph (b)(3)(iii) of this section.

(ii) Original use-(A) In general. De-
preciable property will meet the require-
ments of this paragraph (b)(3)(ii) if the
original use of the property commences
with the taxpayer. Except as provided in
paragraphs (b)(3)(ii)(B) and (C) of this
section, original use means the first use to
which the property is put, whether or not
that use corresponds to the use of the
property by the taxpayer. Additional cap-
ital expenditures incurred by a taxpayer to
recondition or rebuild property acquired
or owned by the taxpayer satisfy the orig-
inal use requirement. However, the cost of
reconditioned or rebuilt property does not
satisfy the original use requirement (but
may satisfy the used property acquisition
requirements in paragraph (b)(3)(iii) of
this section). The question of whether
property is reconditioned or rebuilt prop-

erty is a question of fact. For purposes of
this paragraph (b)(3)(ii)(A), property that
contains used parts will not be treated as
reconditioned or rebuilt if the cost of the
used parts is not more than 20 percent of
the total cost of the property, whether
acquired or self-constructed.

(B) Conversion to business or income-
producing use-(1) Personal use to busi-
ness or income-producing use. If a tax-
payer initially acquires new property for
personal use and subsequently uses the
property in the taxpayer's trade or busi-
ness or for the taxpayer's production of
income, the taxpayer is considered the
original user of the property. If a person
initially acquires new property for per-
sonal use and a taxpayer subsequently ac-
quires the property from the person for
use in the taxpayer's trade or business or
for the taxpayer's production of income,
the taxpayer is not considered the original
user of the property.

(2) Inventory to business or income-
producing use. If a taxpayer initially ac-
quires new property and holds the prop-
erty primarily for sale to customers in the
ordinary course of the taxpayer's business
and subsequently withdraws the property
from inventory and uses the property pri-
marily in the taxpayer's trade or business
or primarily for the taxpayer's production
of income, the taxpayer is considered the
original user of the property. If a person
initially acquires new property and holds
the property primarily for sale to custom-
ers in the ordinary course of the person's
business and a taxpayer subsequently ac-
quires the property from the person for
use primarily in the taxpayer's trade or
business or primarily for the taxpayer's
production of income, the taxpayer is con-
sidered the original user of the property.
For purposes of this paragraph (b)(3)(ii)
(B)(2), the original use of the property by
the taxpayer commences on the date on
which the taxpayer uses the property pri-
marily in the taxpayer's trade or business
or primarily for the taxpayer's production
of income.

(C) Fractional interests in property. If,
in the ordinary course of its business, a
taxpayer sells fractional interests in new
property to third parties unrelated to the
taxpayer, each first fractional owner of the
property is considered as the original user
of its proportionate share of the property.

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Furthermore, if the taxpayer uses the
property before all of the fractional inter-
ests of the property are sold but the prop-
erty continues to be held primarily for sale
by the taxpayer, the original use of any
fractional interest sold to a third party
unrelated to the taxpayer subsequent to
the taxpayer's use of the property begins
with the first purchaser of that fractional
interest. For purposes of this paragraph
(b)(3)(ii)(C), persons are not related if
they do not have a relationship described
in section 267(b) or 707(b) and the regu-
lations under section 267(b) or 707(b).

(iii) Used property acquisition require-
ments-(A) In general. Depreciable prop-
erty will meet the requirements of this
paragraph (b)(3)(iii) if the acquisition of
the used property meets the following re-
quirements:

(1) Such property was not used by the
taxpayer or a predecessor at any time prior
to such acquisition;

(2) The acquisition of such property
meets the requirements of section 179(d)
(2)(A), (B), and (C), and § 1.179-
4(c)(1)(ii), (iii), and (iv), or 1.179-4(c)(2)
(property is acquired by purchase); and

(3) The acquisition of such property
meets the requirements of section 179(d)
(3) and § 1.179-4(d) (cost of property)
(for further guidance regarding like-kind
exchanges and involuntary conversions,
see paragraph (f)(5) of this section).

(B) Property was not used by the tax-
payer at any time prior to acquisition-
(1) In general. Solely for purposes of
paragraph (b)(3)(iii)(A)(1) of this section,
the property is treated as used by the tax-
payer or a predecessor at any time prior to
acquisition by the taxpayer or 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. If a
lessee has a depreciable interest in the im-
provements made to leased property and
subsequently the lessee acquires the leased
property of which the improvements are a
part, the unadjusted depreciable basis, as
defined in § 1.168(b)-1(a)(3), of the ac-
quired property that is eligible for the addi-
tional first year depreciation deduction, as-
suming all other requirements are met, must
not include the unadjusted depreciable basis
attributable to the improvements.

(2) Taxpayer has a depreciable interest
in a portion of the property. If a taxpayer
initially acquires a depreciable interest in
a portion of the property and subsequently
acquires a depreciable interest in an addi-
tional portion of the same property, such
additional depreciable interest is not treated
as used by the taxpayer at any time prior to
its acquisition by the taxpayer. This para-
graph (b)(3)(iii)(B)(2) does not apply if the
taxpayer or a predecessor previously had a
depreciable interest in the subsequently ac-
quired additional portion. For purposes of
this paragraph (b)(3)(iii)(B)(2), a portion of
the property is considered to be the percent-
age interest in the property. If a taxpayer
holds a depreciable interest in a portion of
the property, sells that portion or a part of
that portion, and subsequently acquires a
depreciable interest in another portion of the
same property, the taxpayer will be treated
as previously having a depreciable interest
in the property up to the amount of the
portion for which the taxpayer held a depre-
ciable interest in the property before the
sale.

(3) Application to members of a con-
solidated group-(i) Same consolidated
group. Solely for purposes of applying
paragraph (b)(3)(iii)(A)(1) of this section,
if a member of a consolidated group, as
defined in § 1.1502-1(h), acquires depre-
ciable property in which the consolidated
group had a depreciable interest at any
time prior to the member's acquisition of
the property, the member will be treated
as having a depreciable interest in the
property prior to the acquisition. For pur-
poses of this paragraph (b)(3)(iii)(B)(3)(i),
a consolidated group will be 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.

(ii) Certain acquisitions pursuant to a
series of related transactions. Solely for
purposes of applying paragraph (b)(3)(iii)
(A)(1) of this section, if a series of related
transactions includes one or more transac-
tions in which property is acquired by a
member of a consolidated group and one
or more transactions in which a corpora-
tion that had a depreciable interest in the
property becomes a member of the group,
the member that acquires the property will
be treated as having a depreciable interest

in the property prior to the time of its
acquisition.

(iii) Time for testing membership.
Solely for purposes of applying paragraph
(b)(3)(iii)(B)(3)(i) and (ii) of this section,
if a series of related transactions includes
one or more transactions in which prop-
erty is acquired by a member of a consol-
idated group and one or more transactions
in which the transferee of the property
ceases to be a member of a consolidated
group, whether the taxpayer is a member
of a consolidated group is tested immedi-
ately after the last transaction in the series.

(C) Special rules for a series of related
transactions. Solely for purposes of sec-
tion 168(k)(2)(E)(ii) and paragraph (b)(3)
(iii)(A) of this section, in the case of a
series of related transactions (for example,
a series of related transactions including
the transfer of a partnership interest, the
transfer of partnership assets, or the dis-
position of property and the disposition,
directly or indirectly, of the transferor or
transferee of the property)-

(1) The property is treated as directly
transferred from the original transferor to
the ultimate transferee; and

(2) The relation between the original
transferor and the ultimate transferee is
tested immediately after the last transac-
tion in the series.

(iv) Application to partnerships-(A)
Section 704(c) remedial allocations. Re-
medial allocations under section 704(c) do
not satisfy the requirements of paragraph
(b)(3) of this section. See § 1.704-
3(d)(2).

(B) Basis determined under section
732. Any basis of distributed property de-
termined under section 732 does not sat-
isfy the requirements of paragraph (b)(3)
of this section.

(C) Section 734(b) adjustments. Any
increase in basis of depreciable property
under section 734(b) does not satisfy the
requirements of paragraph (b)(3) of this
section.

(D) Section 743(b) adjustments-(1) In
general. For purposes of determining
whether the transfer of a partnership in-
terest meets the requirements of paragraph
(b)(3)(iii)(A) of this section, each partner
is treated as having a depreciable interest
in the partner's proportionate share of
partnership property. Any increase in ba-
sis of depreciable property under section

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743(b) satisfies the requirements of para-
graph (b)(3)(iii)(A) of this section if -

(i) At any time prior to the transfer of
the partnership interest that gave rise to
such basis increase, neither the transferee
partner nor a predecessor of the transferee
partner had any depreciable interest in the
portion of the property deemed acquired
to which the section 743(b) adjustment is
allocated under section 755 and the regu-
lations under section 755; and

(ii) The transfer of the partnership in-
terest that gave rise to such basis increase
satisfies the requirements of paragraphs
(b)(3)(iii)(A)(2) and (3) of this section.

(2) Relatedness tested at partner level.
Solely for purposes of paragraph (b)(3)
(iv)(D)(1)(ii) of this section, whether the
parties are related or unrelated is deter-
mined by comparing the transferor and the
transferee of the transferred partnership
interest.

(v) Syndication transaction. If a lessor
has a depreciable interest in the property
and the lessor and any predecessor did not
previously have a depreciable interest in
the property, and the property is sold by
the lessor or any subsequent purchaser
within three months after the date the
property was originally placed in service
by the lessor (or, in the case of multiple
units of property subject to the same lease,
within three months after the date the final
unit is placed in service, so long as the
period between the time the first unit is
placed in service and the time the last unit
is placed in service does not exceed 12
months), and the user of the property after
the last sale during the three-month period
remains the same as when the property
was originally placed in service by the
lessor, the purchaser of the property in the
last sale during the three-month period is
considered the taxpayer that acquired the
property for purposes of applying para-
graphs (b)(3)(ii) and (iii) of this section.

(vi) Examples. The application of this
paragraph (b)(3) is illustrated by the fol-
lowing examples. Unless the facts specifi-
cally 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), no corporation is a member of a con-
solidated or controlled group, and the parties
do not have predecessors:

Example 1. (i) On August 1, 2018, A buys a new
machine for $35,000 from an unrelated party for use

in A's trade or business. On July 1, 2020, B buys that
machine from A for $20,000 for use in B's trade or
business. On October 1, 2020, B makes a $5,000
capital expenditure to recondition the machine. B did
not have any depreciable interest in the machine
before B acquired it on July 1, 2020.

(ii) A's purchase price of $35,000 satisfies the
original use requirement of paragraph (b)(3)(ii) of
this section and, assuming all other requirements are
met, qualifies for the additional first year deprecia-
tion deduction.

(iii) B's purchase price of $20,000 does not sat-
isfy the original use requirement of paragraph
(b)(3)(ii) of this section, but it does satisfy the used
property acquisition requirements of paragraph
(b)(3)(iii) of this section. Assuming all other require-
ments are met, the $20,000 purchase price qualifies
for the additional first year depreciation deduction.
Further, B's $5,000 expenditure satisfies the original
use requirement of paragraph (b)(3)(ii) of this sec-
tion and, assuming all other requirements are met,
qualifies for the additional first year depreciation
deduction, regardless of whether the $5,000 is added
to the basis of the machine or is capitalized as a
separate asset.

Example 2. C, an automobile dealer, uses some
of its automobiles as demonstrators in order to show
them to prospective customers. The automobiles that
are used as demonstrators by C are held by C pri-
marily for sale to customers in the ordinary course of
its business. On November 1, 2017, D buys from C
an automobile that was previously used as a demon-
strator by C. D will use the automobile solely for
business purposes. The use of the automobile by C as
a demonstrator does not constitute a "use" for pur-
poses of the original use requirement and, therefore,
D will be considered the original user of the auto-
mobile for purposes of paragraph (b)(3)(ii) of this
section. Assuming all other requirements are met,
D's purchase price of the automobile qualifies for the
additional first year depreciation deduction for D,
subject to any limitation under section 280F.

Example 3. On April 1, 2015, E acquires a horse
to be used in E's thoroughbred racing business. On
October 1, 2018, F buys the horse from E and will
use the horse in F's horse breeding business. F did
not have any depreciable interest in the horse before
F acquired it on October 1, 2018. The use of the
horse by E in its racing business prevents F from
satisfying the original use requirement of paragraph
(b)(3)(ii) of this section. However, F's acquisition of
the horse satisfies the used property acquisition re-
quirements of paragraph (b)(3)(iii) of this section.
Assuming all other requirements are met, F's pur-
chase price of the horse qualifies for the additional
first year depreciation deduction for F.

Example 4. In the ordinary course of its business,
G sells fractional interests in its aircraft to unrelated
parties. G holds out for sale eight equal fractional
interests in an aircraft. On October 1, 2017, G sells
five of the eight fractional interests in the aircraft to
H and H begins to use its proportionate share of the
aircraft immediately upon purchase. On February 1,
2018, G sells to I the remaining unsold 3/g fractional
interests in the aircraft. H is considered the original
user as to its 5/g fractional interest in the aircraft and
I is considered the original user as to its 3/g fractional
interest in the aircraft. Thus, assuming all other re-

quirements are met, H's purchase price for its 5/8
fractional interest in the aircraft qualifies for the
additional first year depreciation deduction and I's
purchase price for its 3/g fractional interest in the
aircraft qualifies for the additional first year depre-
ciation deduction.

Example 5. On September 1, 2017, J, an equip-
ment dealer, buys new tractors that are held by J
primarily for sale to customers in the ordinary course
of its business. On October 15, 2017, J withdraws
the tractors from inventory and begins to use the
tractors primarily for producing rental income. The
holding of the tractors by J as inventory does not
constitute a "use" for purposes of the original use
requirement and, therefore, the original use of the
tractors commences with J on October 15, 2017, for
purposes of paragraph (b)(3)(ii) of this section. How-
ever, the tractors are not eligible for the 100-percent
additional first year depreciation deduction because J
acquired the tractors before September 28, 2017.

Example 6. K is in the trade or business of
leasing equipment to others. During 2016, K buys a
new machine (Machine #1) and then leases it to L for
use in L's trade or business. The lease between K and
L for Machine #1 is a true lease for federal income
tax purposes. During 2018, L enters into a written
binding contract with K to buy Machine #1 at its fair
market value on May 15, 2018. L did not have any
depreciable interest in Machine #1 before L acquired
it on May 15, 2018. As a result, L'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, L's pur-
chase price of Machine #1 qualifies for the additional
first year depreciation deduction for L.

Example 7. The facts are the same as in Example
6 of this paragraph (b)(3)(vi), except that K and L are
related parties within the meaning of section
179(d)(2)(A) or (B) and § 1.179-4(c). As a result,
L's acquisition of Machine #1 does not satisfy the
used property acquisition requirements of paragraph
(b)(3)(iii) of this section. Thus, Machine #1 is not
eligible for the additional first year depreciation de-
duction for L.

Example 8. The facts are the same as in Example
6 of this paragraph (b)(3)(vi), except L incurred
capital expenditures of $5,000 to improve Machine
#1 on September 5, 2017, and has a depreciable
interest in such improvements. L's purchase price of
$5,000 for the improvements to Machine #1 satisfies
the original use requirement of § 1.168(k)-1(b)(3)(i)
and, assuming all other requirements are met, qual-
ifies for the 50-percent additional first year depreci-
ation deduction. Because L had a depreciable interest
only in the improvements to Machine #1, L's acqui-
sition of Machine #1, excluding L's improvements to
such machine, satisfies the used property acquisition
requirements of paragraph (b)(3)(iii) of this section.
Assuming all other requirements are met, L's unad-
justed depreciable basis of Machine #1, excluding
the amount of such unadjusted depreciable basis
attributable to L's improvements to Machine #1,
qualifies for the 100-percent additional first year
depreciation deduction.

Example 9. During 2016, M and N purchased
used equipment for use in their trades or businesses
and each own a 50 percent interest in such equip-
ment. Prior to this acquisition, M and N did not have

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any depreciable interest in the equipment. Assume
this ownership arrangement is not a partnership.
During 2018, N enters into a written binding contract
with M to buy M's interest in the equipment. Pursu-
ant to paragraph (b)(3)(iii)(B)(2) of this section, N is
not treated as using M's interest in the equipment
prior to N's acquisition of M's interest. As a result,
N's acquisition of M's interest in the equipment
satisfies the used property acquisition requirements
of paragraph (b)(3)(iii) of this section. Assuming all
other requirements are met, N's purchase price of
M's interest in the equipment qualifies for the addi-
tional first year depreciation deduction for N.

Example 10. The facts are the same as in Exam-
ple 9 of this paragraph (b)(3)(vi), except N had a 100
percent depreciable interest in the equipment prior to
2016 and M purchased from N a 50 percent interest
in the equipment during 2016. As a result, N's ac-
quisition of M's interest in the equipment during
2018 does not satisfy the used property acquisition
requirements of paragraphs (b)(3)(iii)(A)(1) and
(b)(3)(iii)(B)(1) of this section. Paragraph (b)(3)
(iii)(B)(2) of this section does not apply because N
initially acquired a 100 percent depreciable interest
in the equipment. Accordingly, N's purchase price of
M's interest in the equipment during 2018 does not
qualify for the additional first year depreciation de-
duction for N.

Example 11. The facts are the same as in Exam-
ple 9 of this paragraph (b)(3)(vi), except during
2018, M also enters into a written binding contract
with N to buy N's interest in the equipment. Pursuant
to paragraph (b)(3)(iii)(B)(2) of this section, both M
and N are treated as previously having a depreciable
interest in a 50-percent portion of the equipment.
Accordingly, the acquisition by M of N's 50-percent
interest and the acquisition by N of M's 50-percent
interest in the equipment during 2018 do not qualify
for the additional first year depreciation deduction.

Example 12. O and P form an equal partnership,
OP, in 2018. O contributes cash to OP, and P con-
tributes equipment to OP. OP's basis in the equip-
ment contributed by P is determined under section
723. Because OP's basis in such equipment is deter-
mined in whole or in part by reference to P's ad-
justed basis in such equipment, OP's acquisition of
such equipment 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 para-
graph (b)(3)(iii) of this section. Accordingly, OP's
acquisition of such equipment is not eligible for the
additional first year depreciation deduction.

Example 13. Q, R, and S form an equal partner-
ship, QRS, in 2019. Each partner contributes $100,
which QRS uses to purchase a retail motor fuels
outlet for $300. Assume this retail motor fuels outlet
is QRS' only property and is qualified property under
section 168(k)(2)(A)(i). QRS makes an election not
to deduct the additional first year depreciation for all
qualified property placed in service during 2019.
QRS has a section 754 election in effect. QRS
claimed depreciation of $15 for the retail motor fuels
outlet for 2019. During 2020, when the retail motor
fuels outlet's fair market value is $600, Q sells all of
his partnership interest to T in a fully taxable trans-
action for $200. T never previously had a depreciable
interest in the retail motor fuels outlet. T takes an
outside basis of $200 in the partnership interest pre-

viously owned by Q. T's share of the partnership's
previously taxed capital is $95. Accordingly, T's
section 743(b) adjustment is $105 and is allocated
entirely to the retail motor fuels outlet under section
755. Assuming all other requirements are met, T's
section 743(b) adjustment qualifies for the additional
first year depreciation deduction.

Example 14. The facts are the same as in Exam-
ple 13 of this paragraph (b)(3)(vi), except that Q sells
his partnership interest to U, a related person within
the meaning of section 179(d)(2)(A) or (B) and
§ 1.179-4(c). U's section 743(b) adjustment does
not qualify for the additional first year depreciation
deduction.

Example 15. The facts are the same as in Exam-
ple 13 of this paragraph (b)(3)(vi), except that Q dies
and his partnership interest is transferred to V. V
takes a basis in Q's partnership interest under section
1014. As a result, section 179(d)(2)(C)(ii) and
§ 1.179-4(c)(1)(iv) are not satisfied, and V's section
743(b) adjustment does not qualify for the additional
first year depreciation deduction.

Example 16. The facts are the same as in Exam-
ple 13 of this paragraph (b)(3)(vi), except that QRS
purchased the retail motor fuels outlet from T prior
to T purchasing Q's partnership interest in QRS. T
had a depreciable interest in such retail motor fuels
outlet. Because T had a depreciable interest in the
retail motor fuels outlet before T acquired its interest
in QRS, T's section 743(b) adjustment does not qual-
ify for the additional first year depreciation deduc-
tion.

Example 17. In November 2017, AA Corpora-
tion purchases a used drill press costing $10,000 and
is granted a trade-in allowance of $2,000 on its old
drill press. The used drill press is qualified property
under section 168(k)(2)(A)(i). The old drill press had
a basis of $1,200. Under sections 1012 and 1031(d),
the basis of the used drill press is $9,200 ($1,200
basis of old drill press plus cash expended of
$8,000). Only $8,000 of the basis of the used drill
press satisfies the requirements of section 179(d)(3)
and § 1.179-4(d) and, thus, satisfies the used prop-
erty acquisition requirement of paragraph (b)(3)(iii)
of this section. The remaining $1,200 of the basis of
the used drill press does not satisfy the requirements
of section 179(d)(3) and § 1.179-4(d) because it is
determined by reference to the old drill press. Ac-
cordingly, assuming all other requirements are met,
only $8,000 of the basis of the used drill press is
eligible for the additional first year depreciation de-
duction.

Example 18. In a series of related transactions, a
father sells a machine to an unrelated party who sells
the machine to the father's daughter for use in the
daughter's trade or business. Pursuant to paragraph
(b)(3)(iii)(C) of this section, the transfers of the
machine are treated as a direct transfer from the
father to his daughter and the time to test whether
the parties are related is immediately after the last
transaction in the series. Because the father and the
daughter are related parties within the meaning of
section 179(d)(2)(A) and § 1.179-4(c)(ii), the
daughter's acquisition of the machine does not sat-
isfy the used property acquisition requirements of
paragraph (b)(3)(iii) of this section. Further, because
the transfers of the machine are treated as a direct
transfer from the father to his daughter, the unrelated

party's acquisition of the machine is not eligible for
the additional first year depreciation deduction.

Example 19. Parent owns all of the stock of B
Corporation and C Corporation. Parent, B Corpora-
tion, and C Corporation are all members of the
Parent consolidated group. C Corporation has a de-
preciable interest in Equipment #1. During 2018, C
Corporation sells Equipment #1 to B Corporation.
Prior to this acquisition, B Corporation never had a
depreciable interest in Equipment #1. B Corpora-
tion's acquisition of Equipment #1 does not satisfy
the used property acquisition requirements of para-
graph (b)(3)(iii) of this section for two reasons. First,
B Corporation and C Corporation are related parties
within the meaning of section 179(d)(2)(B) and
§ 1.179-4(c)(2)(iii). Second, pursuant to paragraph
(b)(3)(iii)(B)(3)(i) of this section, B Corporation is
treated as previously having a depreciable interest in
Equipment #1 because B Corporation is a member of
the Parent consolidated group and C Corporation,
while a member of the Parent consolidated group,
had a depreciable interest in Equipment #1. Accord-
ingly, B Corporation's acquisition of Equipment #1
is not eligible for the additional first year deprecia-
tion deduction.

Example 20. (i) Parent owns all of the stock of D
Corporation and E Corporation. Parent, D Corpora-
tion, and E Corporation are all members of the
Parent consolidated group. D Corporation has a de-
preciable interest in Equipment #2. No other mem-
bers of the Parent consolidated group ever had a
depreciable interest in Equipment #2. During 2018,
D Corporation sells Equipment #2 to BA, a person
not related, within the meaning of section 179(d)
(2)(A) or (B) and § 1.179-4(c), to any member of
the Parent consolidated group. In an unrelated
transaction during 2019, E Corporation acquires
Equipment #2 from BA or another person not
related to any member of the Parent consolidated
group within the meaning of section 179(d)(2)(A)
or (B) and § 1.179-4(c).

(ii) Pursuant to paragraph (b)(3)(iii)(B)(3)(i) of
this section, E Corporation is treated as previously
having a depreciable interest in Equipment #2 be-
cause E Corporation is a member of the Parent
consolidated group, and D Corporation, while a
member of the Parent consolidated group, had a
depreciable interest in Equipment #2. As a result, E
Corporation's acquisition of Equipment #2 does not
satisfy the used property acquisition requirements of
paragraph (b)(3)(iii) of this section. Thus, E Corpo-
ration's acquisition of Equipment #2 is not eligible
for the additional first year depreciation deduction.
The results would be the same if D Corporation had
ceased to be a member of the Parent consolidated
group prior to E Corporation's acquisition of Equip-
ment #2.

Example 21. (i) Parent owns all of the stock of F
Corporation and G Corporation. Parent, F Corpora-
tion, and G Corporation are all members of the
Parent consolidated group. G Corporation has a de-
preciable interest in Equipment #3. No other mem-
bers of the Parent consolidated group ever had a
depreciable interest in Equipment #3. X Corporation
is the common parent of a consolidated group and
is not related, within the meaning of section
179(d)(2)(A) or (B) and § 1.179-4(c), to any mem-
ber of the Parent consolidated group. No member of

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the X consolidated group ever had a depreciable
interest in Equipment #3. In a series of related trans-
actions, G Corporation sells Equipment #3 to F Cor-
poration, and Parent sells all of the stock of F Cor-
poration to X Corporation.

(ii) F Corporation was a member of the Parent
consolidated group at the time it acquired Equipment
#3 from G Corporation, another member of the
group. Paragraph (b)(3)(iii)(B)(3)(i) of this section
generally treats each member of a consolidated
group as having a depreciable interest in property
during the time any member of the group had a
depreciable interest in such property while a member of
the group. Nevertheless, because there is a series
of related transactions that includes the acquisition of
Equipment #3 and a transaction in which F Corpora-
tion, the transferee of the property, leaves the Parent
consolidated group and joins the X consolidated group,
the time to test whether F Corporation is a member of
the Parent consolidated group for purposes of para-
graph (b)(3)(iii)(B)(3)(i) of this section is met is imme-
diately after the last transaction in the series, that is, the
sale of the F Corporation stock to X Corporation. See
paragraph (b)(3)(iii)(B)(3)(iii) of this section. Accord-
ingly, because F Corporation is not a member of the
Parent consolidated group after the last transaction of
the series, F Corporation is not treated as previously
having a depreciable interest in Equipment #3 by virtue
of G Corporation's depreciable interest in Equipment
#3 under paragraph (b)(3)(iii)(B)(3)(i) of this section.

(iii) After the sale of the F Corporation stock to
X Corporation, F Corporation is a member of the X
consolidated group. Because no member of the X
consolidated group previously had a depreciable in-
terest in Equipment #3, F Corporation is not treated
as previously having a depreciable interest in Equip-
ment #3 under paragraph (b)(3)(iii)(B)(3)(i) of this
section.

(iv) Because relatedness is tested after F Corpo-
ration leaves the Parent consolidated group, F Cor-
poration and G Corporation are not related within the
meaning of section 179(d)(2)(A) or (B) and § 1.179-
4(c). Accordingly, F Corporation's acquisition of
Equipment #3 satisfies the used property acquisition
requirements of paragraph (b)(3)(iii)(A)(1) of this
section and, assuming all other requirements are met,
F Corporation's acquisition of Equipment #3 is eli-
gible for the additional first year depreciation deduc-
tion.

Example 22. (i) H Corporation, which is not a
member of a consolidated group, has a depreciable
interest in Equipment #4. Parent owns all the stock
of I Corporation, and Parent and I Corporation are
members of the Parent consolidated group. No mem-
ber of the Parent consolidated group ever had a
depreciable interest in Equipment #4. Neither Parent
nor I Corporation is related to H Corporation within
the meaning of section 179(d)(2)(A) or (B) and
§ 1.179-4(c). During 2018, H Corporation sells
Equipment #4 to a person not related to H Corpora-
tion, Parent, or I Corporation within the meaning of
section 179(d)(2)(A) or (B) and § 1.179-4(c). In a
series of related transactions, during 2019, Parent
acquires all of the stock of H Corporation, and I
Corporation purchases Equipment #4 from an unre-
lated person.

(ii) In a series of related transactions, H Corpo-
ration became a member of the Parent consolidated

group, and I Corporation, also a member of the
Parent consolidated group, acquired Equipment #4.
Because H Corporation previously had a depreciable
interest in Equipment #4, pursuant to paragraph
(b)(3)(iii)(B)(3)(ii) of this section, I Corporation is
treated as having a depreciable interest in Equipment
#4. As a result, I Corporation's acquisition of Equip-
ment #4 does not satisfy the used property acquisi-
tion requirements of paragraph (b)(3)(iii) of this sec-
tion. Accordingly, I Corporation's acquisition of
Equipment #4 is not eligible for the additional first
year depreciation deduction.

Example 23. (i) J Corporation, K Corporation,
and L Corporation are unrelated parties within the
meaning of section 179(d)(2)(A) or (B) and § 1.179-
4(c). None of J Corporation, K Corporation, and L
Corporation is a member of a consolidated group. J
Corporation has a depreciable interest in Equipment
#5. During 2018, J Corporation sells Equipment #5
to K Corporation. During 2020, J Corporation
merges into L Corporation in a transaction described
in section 368(a)(1)(A). In 2021, L Corporation ac-
quires Equipment #5 from K Corporation.

(ii) Because J Corporation is the predecessor of L
Corporation and J Corporation previously had a de-
preciable interest in Equipment #5, L Corporation's
acquisition of Equipment #5 does not satisfy para-
graphs (b)(3)(iii)(A)(1) and (b)(3)(iii)(B)(1) of this
section and, thus, does not satisfy the used property
acquisition requirements of paragraph (b)(3)(iii) of
this section. Accordingly, L Corporation's acquisi-
tion of Equipment #5 is not eligible for the additional
first year depreciation deduction.

Example 24. (i) M Corporation acquires and
places in service a used airplane on March 26, 2018.
Prior to this acquisition, M Corporation never had a
depreciable interest in this airplane. On March 26,
2018, M Corporation also leases the used airplane to
N Corporation, an airline company. On May 27,
2018, M Corporation sells to O Corporation the used
airplane subject to the lease with N Corporation. M
Corporation and O Corporation are related parties
within the meaning of section 179(d)(2)(A) or (B)
and § 1.179-4(c). As of May 27, 2018, N Corpora-
tion is still the lessee of the used airplane. Prior to
this acquisition, O Corporation never had a depre-
ciable interest in the used airplane. O Corporation is
a calendar-year taxpayer.

(ii) The sale transaction of May 27, 2018, satis-
fies the requirements of paragraph (b)(3)(v) of this
section. As a result, O Corporation is considered the
taxpayer that acquired the used airplane for purposes
of applying the used property acquisition require-
ments in paragraph (b)(3)(iii) of this section. In
applying these rules, the fact that M Corporation and
O Corporation are related parties is not taken into
account because O Corporation, not M Corporation,
is treated as acquiring the used airplane. Further,
pursuant to paragraph (b)(4)(iv) of this section, the
used airplane is treated as originally placed in ser-
vice by O Corporation on May 27, 2018. Because O
Corporation never had a depreciable interest in the
used airplane and assuming all other requirements
are met, O Corporation's purchase price of the used
airplane qualifies for the 100-percent additional first
year depreciation deduction for O Corporation.

Example 25. (i) The facts are the same as in
Example 24 of this paragraph (b)(3)(vi). Addition-

ally, on September 5, 2018, O Corporation sells to P
Corporation the used airplane subject to the lease
with N Corporation. Prior to this acquisition, P Cor-
poration never had a depreciable interest in the used
airplane.

(ii) Because O Corporation, a calendar-year tax-
payer, placed in service and disposed of the used
airplane during 2018, the used airplane is not eligible
for the additional first year depreciation deduction
for O Corporation pursuant to paragraph (f)(1)(i) of
this section.

(iii) Because P Corporation never had a depre-
ciable interest in the used airplane and assuming all
other requirements are met, P Corporation's pur-
chase price of the used airplane qualifies for the
100-percent additional first year depreciation deduc-
tion for P Corporation.

(4) Placed-in-service date-(i) In gen-
eral. Depreciable property will meet the
requirements of this paragraph (b)(4) if
the property is placed in service by the
taxpayer for use in its trade or business or
for production of income after September
27, 2017; and, except as provided in para-
graphs (b)(2)(i)(A) and (D) of this section,
before January 1, 2027, or, in the case of
property described in section 168(k)(2)(B)
or (C), before January 1, 2028.

(ii) Specified plant. If the taxpayer has
properly made an election to apply section
168(k)(5) for a specified plant, the re-
quirements of this paragraph (b)(4) are
satisfied only if the specified plant is
planted before January 1, 2027, or is
grafted before January 1, 2027, to a plant
that has already been planted, by the tax-
payer in the ordinary course of the taxpay-
er's farming business, as defined in sec-
tion 263A(e)(4).

(iii) Qualified film, television, or live
theatrical production-(A) For purposes
of this paragraph (b)(4), a qualified film or
television production is treated as placed
in service at the time of initial release or
broadcast as defined under § 1.181-
1(a)(7).

(B) For purposes of this paragraph
(b)(4), a qualified live theatrical produc-
tion is treated as placed in service at the
time of the initial live staged performance.
Solely for purposes of this paragraph, the
term initial live staged performance
means the first commercial exhibition of a
production to an audience. However, the
term initial live staged performance does
not include limited exhibition, prior to
commercial exhibition to general audi-
ences, if the limited exhibition is primarily
for purposes of publicity, determining the
need for further production activity, or

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raising funds for the completion of pro-
duction. For example, an initial live
staged performance does not include a
preview of the production if the preview is
primarily to determine the need for further
production activity.

(iv) Syndication transaction. If a lessor
has a depreciable interest in the property
and the lessor and any predecessor did not
previously have a depreciable interest in
the property, and the property is sold by
the lessor or any subsequent purchaser
within three months after the date the
property was originally placed in service
by the lessor (or, in the case of multiple
units of property subject to the same lease,
within three months after the date the final
unit is placed in service, so long as the
period between the time the first unit is
placed in service and the time the last unit
is placed in service does not exceed 12
months), and the user of the property after
the last sale during this three-month pe-
riod remains the same as when the prop-
erty was originally placed in service by
the lessor, the property is treated as orig-
inally placed in service by the purchaser
of the property in the last sale during the
three-month period but not earlier than the
date of the last sale.

(v) Technical termination of a partner-
ship. For purposes of this paragraph
(b)(4), in the case of a technical termina-
tion of a partnership under section 708(b)
(1)(B) occurring in a taxable year begin-
ning before January 1, 2018, qualified
property placed in service by the termi-
nated partnership during the taxable year
of termination is treated as originally
placed in service by the new partnership
on the date the qualified property is con-
tributed by the terminated partnership to
the new partnership.

(vi) Section 168(i)(7) transactions. For
purposes of this paragraph (b)(4), if qual-
ified property is transferred in a transac-
tion described in section 168(i)(7) in the
same taxable year that the qualified prop-
erty is placed in service by the transferor,
the transferred property is treated as orig-
inally placed in service on the date the
transferor placed in service the qualified
property. In the case of multiple transfers
of qualified property in multiple transac-
tions described in section 168(i)(7) in the
same taxable year, the placed-in-service
date of the transferred property is deemed

to be the date on which the first transferor
placed in service the qualified property.

(5) Acquisition of property-(i) In gen-
eral. This paragraph (b)(5) provides rules
for the acquisition requirements in section
13201(h) of the Act. These rules apply to
all property, including self-constructed
property or property described in section
168(k)(2)(B) or (C).

(ii) Acquisition date. Except as pro-
vided in paragraph (b)(5)(vi) of this sec-
tion, depreciable property will meet the
requirements of this paragraph (b)(5) if
the property is acquired by the taxpayer
after September 27, 2017, or is acquired
by the taxpayer pursuant to a written bind-
ing contract entered into by the taxpayer
after September 27, 2017. Property that is
manufactured, constructed, or produced
for the taxpayer by another person under a
written binding contract that is entered
into prior to the manufacture, construc-
tion, or production of the property for use
by the taxpayer in its trade or business or
for its production of income is acquired
pursuant to a written binding contract. If a
taxpayer acquired the property pursuant to
a written binding contract and such con-
tract states the date on which the contract
was entered into and a closing date, deliv-
ery date, or other similar date, the date on
which the contract was entered into is the
date the taxpayer acquired the property.
See paragraph (b)(5)(v) of this section for
when a qualified film, television, or live
theatrical production is treated as acquired
for purposes of this paragraph (b)(5).

(iii) Definition of binding contract-
(A) In general. A contract is binding only
if it is enforceable under State law against
the taxpayer or a predecessor, and does
not limit damages to a specified amount
(for example, by use of a liquidated dam-
ages provision). For this purpose, a con-
tractual provision that limits damages to
an amount equal to at least 5 percent of
the total contract price will not be treated
as limiting damages to a specified amount.
In determining whether a contract limits
damages, the fact that there may be little
or no damages because the contract price
does not significantly differ from fair mar-
ket value will not be taken into account.
For example, if a taxpayer entered into an
irrevocable written contract to purchase
an asset for $100 and the contract did not
contain a provision for liquidated dam-

ages, the contract is considered binding
notwithstanding the fact that the asset had
a fair market value of $99 and under local
law the seller would only recover the dif-
ference in the event the purchaser failed to
perform. If the contract provided for a full
refund of the purchase price in lieu of any
damages allowable by law in the event of
breach or cancellation, the contract is not
considered binding.

(B) Conditions. A contract is binding
even if subject to a condition, as long as
the condition is not within the control of
either party or a predecessor. A contract
will continue to be binding if the parties
make insubstantial changes in its terms
and conditions or if any term is to be
determined by a standard beyond the con-
trol of either party. A contract that im-
poses significant obligations on the tax-
payer or a predecessor will be treated as
binding notwithstanding the fact that cer-
tain terms remain to be negotiated by the
parties to the contract.

(C) Options. An option to either ac-
quire or sell property is not a binding
contract.

(D) Letter of intent. A letter of intent
for an acquisition is not a binding con-
tract.

(E) Supply agreements. A binding con-
tract does not include a supply or similar
agreement if the amount and design spec-
ifications of the property to be purchased
have not been specified. The contract will
not be a binding contract for the property
to be purchased until both the amount and
the design specifications are specified. For
example, if the provisions of a supply or
similar agreement state the design speci-
fications of the property to be purchased, a
purchase order under the agreement for
a specific number of assets is treated as a
binding contract.

(F) Components. A binding contract to
acquire one or more components of a
larger property will not be treated as a
binding contract to acquire the larger
property. If a binding contract to acquire
the component does not satisfy the re-
quirements of this paragraph (b)(5), the
component does not qualify for the addi-
tional first year depreciation deduction.

(iv) Self-constructed property-(A) In
general. If a taxpayer manufactures, con-
structs, or produces property for use by
the taxpayer in its trade or business or for

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its production of income, the acquisition
rules in paragraph (b)(5)(ii) of this section
are treated as met for the property if the
taxpayer begins manufacturing, construct-
ing, or producing the property after Septem-
ber 27, 2017. This paragraph (b)(5)(iv) does
not apply to property that is manufactured,
constructed, or produced for the taxpayer by
another person under a written binding con-
tract that is entered into prior to the manu-
facture, construction, or production of the
property for use by the taxpayer in its trade
or business or for its production of income
(for further guidance, see paragraphs (b)(5)
(ii) and (iii) of this section).

(B) When does manufacture, construc-
tion, or production begin-(1) In general.
For purposes of paragraph (b)(5)(iv)(A) of
this section, manufacture, construction, or
production of property begins when phys-
ical work of a significant nature begins.
Physical work does not include prelimi-
nary activities such as planning or design-
ing, securing financing, exploring, or re-
searching. The determination of when
physical work of a significant nature be-
gins depends on the facts and circum-
stances. For example, if the taxpayer con-
structs a retail motor fuels outlet on-site
for use by the taxpayer in its trade or
business, construction begins when phys-
ical work of a significant nature com-
mences at the site by the taxpayer; that is,
when work begins on the excavation for
footings, pouring the pads for the outlet,
or the driving of foundation pilings into
the ground. Preliminary work, such as
clearing a site, test drilling to determine
soil condition, or excavation to change the
contour of the land (as distinguished from
excavation for footings) does not consti-
tute the beginning of construction. How-
ever, if the taxpayer assembles a retail
motor fuels outlet on-site from modular
units manufactured off-site by the tax-
payer and delivered to the site where the
outlet will be used, manufacturing begins
when physical work of a significant nature
commences at the off-site location by the
taxpayer.

(2) Safe harbor. For purposes of para-
graph (b)(5)(iv)(B)(1) of this section, a
taxpayer may choose to determine when
physical work of a significant nature be-
gins in accordance with this paragraph
(b)(5)(iv)(B)(2). Physical work of a sig-
nificant nature will be considered to begin

at the time the taxpayer incurs (in the case
of an accrual basis taxpayer) or pays (in
the case of a cash basis taxpayer) more
than 10 percent of the total cost of the
property (excluding the cost of any land
and preliminary activities such as plan-
ning or designing, securing financing,
exploring, or researching). A taxpayer
chooses to apply this paragraph (b)(5)(iv)
(B)(2) by filing a federal income tax return
for the placed-in-service year of the prop-
erty that determines when physical work of
a significant nature begins consistent with
this paragraph (b)(5)(iv)(B)(2).

(C) Components of self-constructed
property-(1) Acquired components. If a
binding contract, as defined in paragraph
(b)(5)(iii) of this section, to acquire a
component does not satisfy the require-
ments of paragraph (b)(5)(ii) of this sec-
tion, the component does not qualify for
the additional first year depreciation de-
duction. A binding contract described in
the preceding sentence to acquire one
or more components of a larger self-
constructed property will not preclude the
larger self-constructed property from sat-
isfying the acquisition rules in paragraph
(b)(5)(iv)(A) of this section. Accordingly,
the unadjusted depreciable basis of the
larger self-constructed property that is el-
igible for the additional first year depreci-
ation deduction, assuming all other re-
quirements are met, must not include the
unadjusted depreciable basis of any com-
ponent that does not satisfy the require-
ments of paragraph (b)(5)(ii) of this sec-
tion. If the manufacture, construction, or
production of the larger self-constructed
property begins before September 28,
2017, the larger self-constructed property
and any acquired components related to
the larger self-constructed property do not
qualify for the additional first year depre-
ciation deduction under this section.

(2) Self-constructed components. If the
manufacture, construction, or production
of a component by the taxpayer does not
satisfy the requirements of this paragraph
(b)(5)(iv), the component does not qualify
for the additional first year depreciation de-
duction. However, if the manufacture, con-
struction, or production of a component
does not satisfy the requirements of this
paragraph (b)(5)(iv), but the manufacture,
construction, or production of the larger
self-constructed property satisfies the re-

quirements of this paragraph (b)(5)(iv), the
larger self-constructed property qualifies for
the additional first year depreciation deduc-
tion, assuming all other requirements are
met, even though the component does not
qualify for the additional first year depreci-
ation deduction. Accordingly, the unad-
justed depreciable basis of the larger self-
constructed property that is eligible for the
additional first year depreciation deduction,
assuming all other requirements are met,
must not include the unadjusted depreciable
basis of any component that does not qual-
ify for the additional first year depreciation
deduction. If the manufacture, construction,
or production of the larger self-constructed
property began before September 28, 2017,
the larger self-constructed property and any
self-constructed components related to the
larger self-constructed property do not qual-
ify for the additional first year depreciation
deduction under this section.

(v) Qualified film, television, or live
theatrical production-(A) For purposes
of section 13201(h)(1)(A) of the Act, a
qualified film or television production is
treated as acquired on the date principal
photography commences.

(B) For purposes of section 13201(h)
(1)(A) of the Act, a qualified live theatri-
cal production is treated as acquired on
the date when all of the necessary ele-
ments for producing the live theatrical
production are secured. These elements
may include a script, financing, actors, set,
scenic and costume designs, advertising
agents, music, and lighting.

(vi) Specified plant. If the taxpayer has
properly made an election to apply section
168(k)(5) for a specified plant, the re-
quirements of this paragraph (b)(5) are
satisfied if the specified plant is planted
after September 27, 2017, or is grafted
after September 27, 2017, to a plant that
has already been planted, by the taxpayer
in the ordinary course of the taxpayer's
farming business, as defined in section
263A(e)(4).

(vii) Examples. The application of this
paragraph (b)(5) is illustrated by the fol-
lowing examples. Unless the facts specif-
ically 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), and the parties do not have
predecessors:

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Example 1. On September 1, 2017, BB, a corpo-
ration, entered into a written agreement with CC, a
manufacturer, to purchase 20 new lamps for $100
each within the next two years. Although the agree-
ment specifies the number of lamps to be purchased,
the agreement does not specify the design of the
lamps to be purchased. Accordingly, the agreement
is not a binding contract pursuant to paragraph
(b)(5)(iii)(E) of this section.

Example 2. The facts are the same as in Example
1 of this paragraph (b)(5)(vii). On December 1,
2017, BB placed a purchase order with CC to pur-
chase 20 new model XPC5 lamps for $100 each for
a total amount of $2,000. Because the agreement
specifies the number of lamps to be purchased and
the purchase order specifies the design of the lamps
to be purchased, the purchase order placed by BB
with CC on December 1, 2017, is a binding contract
pursuant to paragraph (b)(5)(iii)(E) of this section.
Accordingly, assuming all other requirements are
met, the cost of the 20 lamps qualifies for the 100-
percent additional first year depreciation deduction.

Example 3. The facts are the same as in Example
1 of this paragraph (b)(5)(vii), except that the written
agreement between BB and CC is to purchase 100
model XPC5 lamps for $100 each within the next
two years. Because this agreement specifies the
amount and design of the lamps to be purchased, the
agreement is a binding contract pursuant to para-
graph (b)(5)(iii)(E) of this section. However, be-
cause the agreement was entered into before Sep-
tember 28, 2017, no lamp acquired by BB under this
contract qualifies for the 100-percent additional first
year depreciation deduction.

Example 4. On September 1, 2017, DD began
constructing a retail motor fuels outlet for its own
use. On November 1, 2018, DD ceases construction
of the retail motor fuels outlet prior to its completion.
Between September 1, 2017, and November 1, 2018,
DD incurred $3,000,000 of expenditures for the con-
struction of the retail motor fuels outlet. On May 1,
2019, DD resumed construction of the retail motor
fuels outlet and completed its construction on Au-
gust 31, 2019. Between May 1, 2019, and August 31,
2019, DD incurred another $1,600,000 of expendi-
tures to complete the construction of the retail motor
fuels outlet and, on September 1, 2019, DD placed
the retail motor fuels outlet in service. None of DD's
total expenditures of $4,600,000 qualify for the 100-
percent additional first year depreciation deduction
because, pursuant to paragraph (b)(5)(iv)(A) of this
section, DD began constructing the retail motor fuels
outlet before September 28, 2017.

Example 5. The facts are the same as in Example
4 of this paragraph (b)(5)(vii) except that DD began
constructing the retail motor fuels outlet for its own
use on October 1, 2017, and DD incurred the
$3,000,000 between October 1, 2017, and November
1, 2018. DD's total expenditures of $4,600,000 qual-
ify for the 100-percent additional first year depreci-
ation deduction because, pursuant to paragraph
(b)(5)(iv)(A) of this section, DD began constructing
the retail motor fuels outlet after September 27,
2017, and DD placed the retail motor fuels outlet in
service on September 1, 2019. Accordingly, assum-
ing all other requirements are met, the additional first
year depreciation deduction for the retail motor fuels

outlet will be $4,600,000, computed as $4,600,000
multiplied by 100 percent.

Example 6. On August 15, 2017, EE entered into
a written binding contract with FF to manufacture an
aircraft described in section 168(k)(2)(C) for use in
EE's trade or business. FF begins to manufacture the
aircraft on October 1, 2017. EE places the aircraft in
service on March 1, 2018. Pursuant to paragraph
(b)(5)(ii) of this section, the aircraft is acquired by
EE pursuant to a written binding contract. Because
EE entered into such contract before September 28,
2017, the aircraft does not qualify for the 100-
percent additional first year depreciation deduction.

Example 7. On June 1, 2017, HH entered into a
written binding contract to acquire a new component
part of property that is being constructed by HH for
its own use in its trade or business. HH commenced
construction of the property in November 2017, and
placed the property in service in November 2018.
Because HH entered into a written binding contract
to acquire a component part prior to September 28,
2017, pursuant to paragraphs (b)(5)(ii) and (b)(5)
(iv)(C)(1) of this section, the component part does
not qualify for the 100-percent additional first year
depreciation deduction. However, pursuant to para-
graphs (b)(5)(iv)(A) and (b)(5)(iv)(C)(1) of this sec-
tion, the property constructed by HH will qualify for
the 100-percent additional first year depreciation de-
duction, because construction of the property began
after September 27, 2017, assuming all other re-
quirements are met. Accordingly, the unadjusted de-
preciable basis of the property that is eligible for the
100-percent additional first year depreciation deduc-
tion must not include the unadjusted depreciable
basis of the component part.

Example 8. The facts are the same as in Example
7 of this paragraph (b)(5)(vii) except that HH entered
into the written binding contract to acquire the new
component part on September 30, 2017, and HH
commenced construction of the property on August
1, 2017. Pursuant to paragraphs (b)(5)(iv)(A) and
(C) of this section, neither the property constructed
by HH nor the component part will qualify for the
100-percent additional first year depreciation deduc-
tion, because HH began construction of the property
prior to September 28, 2017.

Example 9. On September 1, 2017, II acquired
and placed in service equipment. On October 15,
2017, II sells the equipment to JJ and leases the
property back from JJ in a sale-leaseback transac-
tion. Pursuant to paragraph (b)(5)(ii) of this section,
II's cost of the equipment does not qualify for the
100-percent additional first year depreciation deduc-
tion because II acquired the equipment prior to Sep-
tember 28, 2017. However, JJ acquired used equip-
ment from an unrelated party after September 27,
2017, and, assuming all other requirements are met,
JJ's cost of the used equipment does qualify for the
100-percent additional first year depreciation deduc-
tion for JJ.

Example 10. On July 1, 2017, KK began con-
structing property for its own use in its trade or
business. KK placed this property in service on Sep-
tember 15, 2017. On October 15, 2017, KK sells the
property to LL and leases the property back from LL
in a sale-leaseback transaction. Pursuant to para-
graph (b)(5)(iv) of this section, KK's cost of the
property does not qualify for the 100-percent addi-

tional first year depreciation deduction because con-
struction began prior to September 28, 2017. How-
ever, LL acquired used property from an unrelated
party after September 27, 2017, and, assuming all
other requirements are met, LL's cost of the used
property does qualify for the 100-percent additional
first year depreciation deduction for LL.

(c) Property described in section
168(k)(2)(B) or (C)-(1) In general. Prop-
erty described in section 168(k)(2)(B) or
(C) will meet the acquisition requirements
of section 168(k)(2)(B)(i)(III) or (k)(2)(C)
(i) if the property is acquired by the tax-
payer before January 1, 2027, or acquired
by the taxpayer pursuant to a written bind-
ing contract that is entered into before
January 1, 2027. Property described in
section 168(k)(2)(B) or (C) also must
meet the acquisition requirement in sec-
tion 13201(h)(1)(A) of the Act (for further
guidance, see paragraph (b)(5) of this sec-
tion).

(2) Definition of binding contract. For
purposes of this paragraph (c), the rules in
paragraph (b)(5)(iii) of this section for a
binding contract apply.

(3) Self-constructed property-(i) In
general. If a taxpayer manufactures, con-
structs, or produces property for use by
the taxpayer in its trade or business or for
its production of income, the acquisition
rules in paragraph (c)(1) of this section are
treated as met for the property if the tax-
payer begins manufacturing, constructing,
or producing the property before January
1, 2027. Property that is manufactured, con-
structed, or produced for the taxpayer by
another person under a written binding con-
tract, 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 for its production of
income is considered to be manufactured,
constructed, or produced by the taxpayer. If
a taxpayer enters into a written binding con-
tract, as defined in paragraph (b)(5)(iii) of
this section, before January 1, 2027, with
another person to manufacture, construct,
or produce property described in section
168(k)(2)(B) or (C) and the manufacture,
construction, or production of this property
begins after December 31, 2026, the acqui-
sition rule in paragraph (c)(1) of this section
is met.

(ii) When does manufacture, construc-
tion, or production begin-(A) In gen-
eral. For purposes of this paragraph

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(c)(3), manufacture, construction, or pro-
duction of property begins when physical
work of a significant nature begins. Phys-
ical work does not include preliminary
activities such as planning or designing,
securing financing, exploring, or research-
ing. The determination of when physical
work of a significant nature begins de-
pends on the facts and circumstances. For
example, if a retail motor fuels outlet is to
be constructed on-site, construction be-
gins when physical work of a significant
nature commences at the site; that is,
when work begins on the excavation for
footings, pouring the pads for the outlet,
or the driving of foundation pilings into
the ground. Preliminary work, such as
clearing a site, test drilling to determine
soil condition, or excavation to change the
contour of the land (as distinguished from
excavation for footings) does not consti-
tute the beginning of construction. How-
ever, if a retail motor fuels outlet is to be
assembled on-site from modular units
manufactured off-site and delivered to the
site where the outlet will be used, manu-
facturing begins when physical work of a
significant nature commences at the off-
site location.

(B) Safe harbor. For purposes of para-
graph (c)(3)(ii)(A) of this section, a tax-
payer may choose to determine when
physical work of a significant nature be-
gins in accordance with this paragraph
(c)(3)(ii)(B). Physical work of a signifi-
cant nature will be considered to begin at
the time the taxpayer incurs (in the case of
an accrual basis taxpayer) or pays (in the
case of a cash basis taxpayer) more than
10 percent of the total cost of the property
(excluding the cost of any land and pre-
liminary activities such as planning or de-
signing, securing financing, exploring, or
researching). When property is manufac-
tured, constructed, or produced for the
taxpayer by another person, this safe har-
bor test must be satisfied by the taxpayer.
For example, if a retail motor fuels outlet
is to be constructed for an accrual basis
taxpayer by another person for the total
cost of $200,000 (excluding the cost of
any land and preliminary activities such as
planning or designing, securing financing,
exploring, or researching), construction is
deemed to begin for purposes of this para-
graph (c)(3)(ii)(B) when the taxpayer has
incurred more than 10 percent (more than

$20,000) of the total cost of the property.
A taxpayer chooses to apply this para-
graph (c)(3)(ii)(B) by filing a federal in-
come tax return for the placed-in-service
year of the property that determines when
physical work of a significant nature
begins consistent with this paragraph
(c)(3)(ii)(B).

(iii) Components of self-constructed
property-(A) Acquired components. If a
binding contract, as defined in paragraph
(b)(5)(iii) of this section, to acquire a
component does not satisfy the require-
ments of paragraph (c)(1) of this section,
the component does not qualify for the
additional first year depreciation deduc-
tion. A binding contract described in the
preceding sentence to acquire one or more
components of a larger self-constructed
property will not preclude the larger self-
constructed property from satisfying the
acquisition rules in paragraph (c)(3)(i) of
this section. Accordingly, the unadjusted
depreciable basis of the larger self-
constructed property that is eligible for the
additional first year depreciation deduc-
tion, assuming all other requirements are
met, must not include the unadjusted de-
preciable basis of any component that
does not satisfy the requirements of para-
graph (c)(1) of this section. If a binding
contract to acquire the component is en-
tered into before January 1, 2027, but the
manufacture, construction, or production
of the larger self-constructed property
does not begin before January 1, 2027, the
component qualifies for the additional first
year depreciation deduction, assuming all
other requirements are met, but the larger
self-constructed property does not.

(B) Self-constructed components. If the
manufacture, construction, or production
of a component by the taxpayer does not
satisfy the requirements of paragraph
(c)(3)(i) of this section, the component
does not qualify for the additional first
year depreciation deduction. However, if
the manufacture, construction, or produc-
tion of a component does not satisfy the
requirements of paragraph (c)(3)(i) of this
section, but the manufacture, construc-
tion, or production of the larger self-
constructed property satisfies the require-
ments of paragraph (c)(3)(i) of this
section, the larger self-constructed prop-
erty qualifies for the additional first year
depreciation deduction, assuming all other

requirements are met, even though the
component does not qualify for the addi-
tional first year depreciation deduction.
Accordingly, the unadjusted depreciable
basis of the larger self-constructed prop-
erty that is eligible for the additional first
year depreciation deduction, assuming all
other requirements are met, must not in-
clude the unadjusted depreciable basis of
any component that does not qualify for
the additional first year depreciation de-
duction. If the manufacture, construction,
or production of a component begins be-
fore January 1, 2027, but the manufacture,
construction, or production of the larger
self-constructed property does not begin
before January 1, 2027, the component
qualifies for the additional first year de-
preciation deduction, assuming all other
requirements are met, but the larger self-
constructed property does not.

(iv) Examples. The application of this
paragraph (c) is illustrated by the follow-
ing examples:

Example 1. On June 1, 2017, MM decided to
construct property described in section 168(k)(2)(B)
for its own use. However, one of the component
parts of the property had to be manufactured by
another person for MM. On August 15, 2017, MM
entered into a written binding contract with NN to
acquire this component part of the property for
$100,000. The manufacture of the component part
commenced on September 1, 2018, and MM re-
ceived the completed component part on February 1,
2020. The cost of this component part is 9 percent of
the total cost of the property to be constructed by
MM. MM began constructing the property described
in section 168(k)(2)(B) on January 15, 2020, and
placed this property, including all component parts,
in service on November 1, 2021. Pursuant to para-
graphs (b)(5)(iv)(C)(1) and (c)(1) of this section, the
component part of $100,000 manufactured by NN for
MM is not eligible for the 100-percent additional first
year depreciation deduction because the written
binding contract to acquire such component part was
entered into before September 28, 2017. However,
pursuant to paragraph (c)(3)(i) of this section, the
cost of the property described in section 168(k)(2)
(B), excluding the cost of the component part of
$100,000 manufactured by NN for MM, is eligible
for the 100-percent additional first year depreciation
deduction, assuming all other requirements are met,
because construction of the property began after
September 27, 2017, and before January 1, 2027, and
the property described in section 168(k)(2)(B) was
placed in service by MM before January 1, 2028.

Example 2. On June 1, 2026, OO decided to
construct property described in section 168(k)(2)(B)
for its own use. However, one of the component
parts of the property had to be manufactured by
another person for OO. On August 15, 2026, OO
entered into a written binding contract with PP to
acquire this component part of the property for
$100,000. The manufacture of the component part

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commenced on September 1, 2026, and OO received
the completed component part on February 1, 2027.
The cost of this component part is 9 percent of the
total cost of the property to be constructed by OO.
OO began constructing the property described in
section 168(k)(2)(B) on January 15, 2027, and
placed this property, including all component parts,
in service on November 1, 2027. Pursuant to
paragraph (c)(3)(iii)(B) of this section, the self-
constructed component part of $100,000 manufac-
tured by PP for OO is eligible for the additional first
year depreciation deduction, assuming all other re-
quirements are met, because the manufacturing of
the component part began before January 1, 2027, and
the property described in section 168(k)(2)(B), the
larger self-constructed property, was placed in service
by OO before January 1, 2028. However, pursuant to
paragraph (c)(3)(i) of this section, the cost of the prop-
erty described in section 168(k)(2)(B), excluding
the cost of the self-constructed component part of
$100,000 manufactured by PP for OO, is not eligible
for the additional first year depreciation deduction be-
cause construction of the property began after Decem-
ber 31, 2026.

Example 3. On December 1, 2026, QQ entered
into a written binding contract, as defined in para-
graph (b)(5)(iii) of this section, with RR to manufac-
ture an aircraft described in section 168(k)(2)(C) for
use in QQ's trade or business. RR begins to manu-
facture the aircraft on February 1, 2027. QQ places
the aircraft in service on August 1, 2027. Pursuant to
paragraph (c)(3)(i) of this section, the aircraft meets
the requirements of paragraph (c)(1) of this section
because the aircraft was acquired by QQ pursuant to
a written binding contract entered into before Janu-
ary 1, 2027. Further, the aircraft was placed in ser-
vice by QQ before January 1, 2028. Thus, assuming
all other requirements are met, QQ's cost of the
aircraft is eligible for the additional first year depre-
ciation deduction.

(d) Computation of depreciation de-
duction for qualified property-(1) Addi-
tional first year depreciation deduction-
(i) Allowable taxable year. The additional
first year depreciation deduction is allow-
able-

(A) Except as provided in paragraph
(d)(1)(i)(B) or (f) of this section, in the
taxable year in which the qualified prop-
erty is placed in service by the taxpayer
for use in its trade or business or for the
production of income; or

(B) In the taxable year in which the
specified plant is planted, or grafted to a
plant that has already been planted, by the
taxpayer in the ordinary course of the tax-
payer's farming business, as defined in
section 263A(e)(4), if the taxpayer prop-
erly made the election to apply section
168(k)(5) (for further guidance, see para-
graph (e) of this section).

(ii) Computation. Except as provided in
paragraph (f)(5) of this section, the allow-
able additional first year depreciation deduc-

tion for qualified property is determined by
multiplying the unadjusted depreciable ba-
sis, as defined in § 1.168(b)-1(a)(3), of the
qualified property by the applicable percent-
age. Except as provided in paragraph (f)(1)
of this section, the additional first year de-
preciation deduction is not affected by a
taxable year of less than 12 months. See
paragraph (f)(1) of this section for qualified
property placed in service or planted or
grafted, as applicable, and disposed of dur-
ing the same taxable year. See paragraph
(f)(5) of this section for qualified property
acquired in a like-kind exchange or as a
result of an involuntary conversion.

(iii) Property described in section
168(k)(2)(B). For purposes of paragraph
(d)(1)(ii) of this section, the unadjusted de-
preciable basis, as defined in § 1.168(b)-
1(a)(3), of qualified property described in
section 168(k)(2)(B) is limited to the prop-
erty's unadjusted depreciable basis attribut-
able to the property's manufacture, con-
struction, or production before January 1,
2027.

(iv) Alternative minimum tax-(A) In
general. The additional first year depreci-
ation deduction is allowable for alterna-
tive minimum tax purposes-

(1) Except as provided in paragraph
(d)(1)(iv)(A)(2) of this section, in the tax-
able year in which the qualified property
is placed in service by the taxpayer; or

(2) In the taxable year in which a spec-
ified plant is planted by the taxpayer, or
grafted by the taxpayer to a plant that was
previously planted, if the taxpayer prop-
erly made the election to apply section
168(k)(5) (for further guidance, see para-
graph (e) of this section).

(B) Special rules. In general, the addi-
tional first year depreciation deduction for
alternative minimum tax purposes is
based on the unadjusted depreciable basis
of the property for alternative minimum
tax purposes. However, see paragraph
(f)(5)(iii)(E) of this section for qualified
property acquired in a like-kind exchange
or as a result of an involuntary conversion.

(2) Otherwise allowable depreciation
deduction-(i) In general. Before deter-
mining the amount otherwise allowable as a
depreciation deduction for the qualified
property for the placed-in-service year and
any subsequent taxable year, the taxpayer
must determine the remaining adjusted de-
preciable basis of the qualified property.

This remaining adjusted depreciable basis is
equal to the unadjusted depreciable basis, as
defined in § 1.168(b)-1(a)(3), of the quali-
fied property reduced by the amount of the
additional first year depreciation allowed or
allowable, whichever is greater. The re-
maining adjusted depreciable basis of the
qualified property is then depreciated using
the applicable depreciation provisions under
the Internal Revenue Code for the qualified
property. The remaining adjusted deprecia-
ble basis of the qualified property that is
MACRS property is also the basis to which
the annual depreciation rates in the optional
depreciation tables apply (for further guid-
ance, see section 8 of Rev. Proc. 87-57
(1987-2 C.B. 687) and § 601.601(d)(2)
(ii)(b) of this chapter). The depreciation de-
duction allowable for the remaining ad-
justed depreciable basis of the qualified
property is affected by a taxable year of less
than 12 months.

(ii) Alternative minimum tax. For alter-
native minimum tax purposes, the depre-
ciation deduction allowable for the re-
maining adjusted depreciable basis of the
qualified property is based on the remain-
ing adjusted depreciable basis for alterna-
tive minimum tax purposes. The remain-
ing adjusted depreciable basis of the
qualified property for alternative mini-
mum tax purposes is depreciated using the
same depreciation method, recovery pe-
riod (or useful life in the case of computer
software), and convention that apply to
the qualified property for regular tax pur-
poses.

(3) Examples. This paragraph (d) is
illustrated by the following examples:

Example 1. On March 1, 2023, SS, a calendar-
year taxpayer, purchased and placed in service qual-
ified property that costs $1 million and is 5-year
property under section 168(e). SS depreciates its
5-year property placed in service in 2023 using the
optional depreciation table that corresponds with the
general depreciation system, the 200-percent declin-
ing balance method, a 5-year recovery period, and
the half-year convention. For 2023, SS is allowed an
80-percent additional first year depreciation deduc-
tion of $800,000 (the unadjusted depreciable basis of
$1 million multiplied by 0.80). Next, SS must reduce
the unadjusted depreciable basis of $1 million by the
additional first year depreciation deduction of
$800,000 to determine the remaining adjusted depre-
ciable basis of $200,000. Then, SS' depreciation
deduction allowable in 2023 for the remaining ad-
justed depreciable basis of $200,000 is $40,000 (the
remaining adjusted depreciable basis of $200,000
multiplied by the annual depreciation rate of 0.20 for
recovery year 1).

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Example 2. On June 1, 2023, TT, a calendar-year
taxpayer, purchased and placed in service qualified
property that costs $1,500,000. The property quali-
fies for the expensing election under section 179 and
is 5-year property under section 168(e). TT did not
purchase any other section 179 property in 2023. TT
makes the election under section 179 for the property
and depreciates its 5-year property placed in service
in 2023 using the optional depreciation table that
corresponds with the general depreciation system,
the 200-percent declining balance method, a 5-year
recovery period, and the half-year convention. As-
sume the maximum section 179 deduction for 2023
is $1,000,000. For 2023, TT is first allowed a
$1,000,000 deduction under section 179. Next, TT
must reduce the cost of $1,500,000 by the section
179 deduction of $1,000,000 to determine the unad-
justed depreciable basis of $500,000. Then, for 2023,
TT is allowed an 80-percent additional first year
depreciation deduction of $400,000 (the unadjusted
depreciable basis of $500,000 multiplied by 0.80).
Next, TT must reduce the unadjusted depreciable
basis of $500,000 by the additional first year depre-
ciation deduction of $400,000 to determine the re-
maining adjusted depreciable basis of $100,000.
Then, TT's depreciation deduction allowable in 2023
for the remaining adjusted depreciable basis of
$100,000 is $20,000 (the remaining adjusted depre-
ciable basis of $100,000 multiplied by the annual
depreciation rate of 0.20 for recovery year 1).

(e) Elections under section 168(k)-(1)
Election not to deduct additional first year
depreciation-(i) In general. A taxpayer
may make an election not to deduct the
additional first year depreciation for any
class of property that is qualified property
placed in service during the taxable year. If
this election is made, the election applies to
all qualified property that is in the same
class of property and placed in service in the
same taxable year, and no additional first
year depreciation deduction is allowable for
the property placed in service during the
taxable year in the class of property, except
as provided in § 1.743-1(j)(4)(i)(B)(1).

(ii) Definition of class of property. For
purposes of this paragraph (e)(1), the term
class of property means:

(A) Except for the property described
in paragraphs (e)(1)(ii)(B) and (D), and
(e)(2) of this section, each class of prop-
erty described in section 168(e) (for ex-
ample, 5-year property);

(B) Water utility property as defined in
section 168(e)(5) and depreciated under
section 168;

(C) Computer software as defined in,
and depreciated under, section 167(f)(1) and
the regulations under section 167(f)(1);

(D) Qualified improvement property as
defined in § 1.168(b)-1(a)(5)(i)(C) and

(a)(5)(ii), and depreciated under section
168;

(E) Each separate production, as de-
fined in § 1.181-3(b), of a qualified film
or television production;

(F) Each separate production, as de-
fined in section 181(e)(2), of a qualified
live theatrical production; or

(G) A partner's basis adjustment in
partnership assets under section 743(b) for
each class of property described in para-
graphs (e)(1)(ii)(A) through (F), and
(e)(2) of this section (for further guidance,
see § 1.743-1(j)(4)(i)(B)(1)).

(iii) Time and manner for making elec-
tion-(A) Time for making election. Any
election specified in paragraph (e)(1)(i) of
this section must be made by the due date,
including extensions, of the Federal tax
return for the taxable year in which the
qualified property is placed in service by
the taxpayer.

(B) Manner of making election. Any
election specified in paragraph (e)(1)(i) of
this section must be made in the manner
prescribed on Form 4562, "Depreciation
and Amortization," and its instructions.
The election is made separately by each
person owning qualified property (for ex-
ample, for each member of a consolidated
group by the common parent of the group,
by the partnership (including basis adjust-
ments in the partnership assets under sec-
tion 743(b)), or by the S corporation). If
Form 4562 is revised or renumbered, any
reference in this section to that form shall
be treated as a reference to the revised or
renumbered form.

(iv) Failure to make election. If a tax-
payer does not make the election specified
in paragraph (e)(1)(i) of this section
within the time and in the manner pre-
scribed in paragraph (e)(1)(iii) of this sec-
tion, the amount of depreciation allowable
for that property under section 167(f)(1)
or 168, as applicable, must be determined
for the placed-in-service year and for all
subsequent taxable years by taking into
account the additional first year deprecia-
tion deduction. Thus, any election speci-
fied in paragraph (e)(1)(i) of this section
shall not be made by the taxpayer in any
other manner (for example, the election
cannot be made through a request under
section 446(e) to change the taxpayer's
method of accounting).

(2) Election to apply section 168(k)(5)
for specified plants-(i) In general. A tax-
payer may make an election to apply sec-
tion 168(k)(5) to one or more specified
plants that are planted, or grafted to a
plant that has already been planted, by the
taxpayer in the ordinary course of the tax-
payer's farming business, as defined in
section 263A(e)(4). If this election is
made for a specified plant, such plant is
not treated as qualified property under
section 168(k) and this section in its
placed-in-service year.

(ii) Time and manner for making elec-
tion-(A) Time for making election. Any
election specified in paragraph (e)(2)(i) of
this section must be made by the due date,
including extensions, of the Federal tax
return for the taxable year in which the
taxpayer planted or grafted the specified
plant to which the election applies.

(B) Manner of making election. Any
election specified in paragraph (e)(2)(i) of
this section must be made in the manner
prescribed on Form 4562, "Depreciation
and Amortization," and its instructions.
The election is made separately by each
person owning specified plants (for exam-
ple, for each member of a consolidated
group by the common parent of the group,
by the partnership, or by the S corpora-
tion). If Form 4562 is revised or renum-
bered, any reference in this section to that
form shall be treated as a reference to the
revised or renumbered form.

(iii) Failure to make election. If a tax-
payer does not make the election specified
in paragraph (e)(2)(i) of this section for a
specified plant within the time and in the
manner prescribed in paragraph (e)(2)(ii)
of this section, the specified plant is
treated as qualified property under section
168(k), assuming all requirements are
met, in the taxable year in which such
plant is placed in service by the taxpayer.
Thus, any election specified in paragraph
(e)(2)(i) of this section shall not be made
by the taxpayer in any other manner (for
example, the election cannot be made
through a request under section 446(e) to
change the taxpayer's method of account-
ing).

(3) Election for qualified property
placed in service during the 2017 taxable
year-(i) In general. A taxpayer may
make an election to deduct 50 percent,
instead of 100 percent, additional first

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year depreciation for all qualified property
acquired after September 27, 2017, by the
taxpayer and placed in service by the tax-
payer during its taxable year that includes
September 28, 2017. If a taxpayer makes
an election to apply section 168(k)(5) for
its taxable year that includes September
28, 2017, the taxpayer also may make an
election to deduct 50 percent, instead of
100 percent, additional first year depreci-
ation for all specified plants that are
planted, or grafted to a plant that has al-
ready been planted, after September 27,
2017, by the taxpayer in the ordinary
course of the taxpayer's farming business
during such taxable year.

(ii) Time and manner for making elec-
tion-(A) Time for making election. Any
election specified in paragraph (e)(3)(i) of
this section must be made by the due date,
including extensions, of the Federal tax
return for the taxpayer's taxable year that
includes September 28, 2017.

(B) Manner of making election. Any
election specified in paragraph (e)(3)(i) of
this section must be made in the manner
prescribed on the 2017 Form 4562, "De-
preciation and Amortization," and its in-
structions. The election is made separately
by each person owning qualified property
(for example, for each member of a con-
solidated group by the common parent of
the group, by the partnership, or by the S
corporation).

(iii) Failure to make election. If a tax-
payer does not make the election specified
in paragraph (e)(3)(i) of this section
within the time and in the manner pre-
scribed in paragraph (e)(3)(ii) of this
section, the amount of depreciation allow-
able for qualified property under section
167(f)(1) or 168, as applicable, acquired
and placed in service, or planted or
grafted, as applicable, by the taxpayer af-
ter September 27, 2017, must be deter-
mined for the taxable year that includes
September 28, 2017, and for all subse-
quent taxable years by taking into account
the 100-percent additional first year de-
preciation deduction, unless the taxpayer
makes the election specified in paragraph
(e)(1)(i) of this section within the time and
in the manner prescribed in paragraph
(e)(1)(iii) of this section for the class of
property in which the qualified property is
included. Thus, any election specified in
paragraph (e)(3)(i) of this section shall not

be made by the taxpayer in any other
manner (for example, the election cannot
be made through a request under section
446(e) to change the taxpayer's method of
accounting).

(4) Alternative minimum tax. If a tax-
payer makes an election specified in para-
graph (e)(1) of this section for a class of
property or in paragraph (e)(2) of this
section for a specified plant, the depreci-
ation adjustments under section 56 and the
regulations under section 56 do not apply
to the property or specified plant, as ap-
plicable, to which that election applies for
purposes of computing the taxpayer's al-
ternative minimum taxable income. If a tax-
payer makes an election specified in para-
graph (e)(3) of this section for all qualified
property, see paragraphs (d)(1)(iv) and
(d)(2)(ii) of this section.

(5) Revocation of election-(i) In gen-
eral. Except as provided in paragraph
(e)(5)(ii) of this section, an election spec-
ified in this paragraph (e), once made,
may be revoked only by filing a request
for a private letter ruling and obtaining the
Commissioner of Internal Revenue's writ-
ten consent to revoke the election. The
Commissioner may grant a request to re-
voke the election if the taxpayer acted rea-
sonably and in good faith, and the revoca-
tion will not prejudice the interests of the
Government. See generally § 301.9100-3
of this chapter. An election specified in this
paragraph (e) 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 an election specified in this
paragraph (e), an automatic extension of 6
months from the due date of the taxpay-
er's Federal tax return, excluding exten-
sions, for the placed-in-service year or the
taxable year in which the specified plant is
planted or grafted, as applicable, is
granted to revoke that election, provided
the taxpayer timely filed the taxpayer's
Federal tax return for the placed-in-
service year or the taxable year in which
the specified plant is planted or grafted, as
applicable, and, within this 6-month ex-
tension period, the taxpayer, and all tax-
payers whose tax liability would be af-
fected by the election, file an amended
Federal tax return for the placed-in-
service year or the taxable year in which
the specified plant is planted or grafted, as

applicable, in a manner that is consistent
with the revocation of the election.

(f) Special rules-(1) Property placed
in service and disposed of in the same
taxable year-(i) In general. Except as
provided in paragraphs (f)(1)(ii) and (iii)
of this section, the additional first year
depreciation deduction is not allowed for
qualified property placed in service or
planted or grafted, as applicable, and dis-
posed of during the same taxable year.
Also if qualified property is placed in ser-
vice and disposed of during the same tax-
able year and then reacquired and again
placed in service in a subsequent taxable
year, the additional first year depreciation
deduction is not allowable for the property
in the subsequent taxable year.

(ii) Technical termination of a partner-
ship. In the case of a technical termination
of a partnership under section 708(b)(1)(B)
in a taxable year beginning before January
1, 2018, the additional first year deprecia-
tion deduction is allowable for any qualified
property placed in service or planted or
grafted, as applicable, by the terminated
partnership during the taxable year of termi-
nation and contributed by the terminated
partnership to the new partnership. The al-
lowable additional first year depreciation
deduction for the qualified property shall not
be claimed by the terminated partnership but
instead shall be claimed by the new partner-
ship for the new partnership's taxable year
in which the qualified property was contrib-
uted by the terminated partnership to the
new partnership. However, if qualified
property is both placed in service or planted
or grafted, as applicable, and contributed to
a new partnership in a transaction described
in section 708(b)(1)(B) by the terminated
partnership during the taxable year of termi-
nation, and if such property is disposed of
by the new partnership in the same taxable
year the new partnership received such
property from the terminated partnership,
then no additional first year depreciation
deduction is allowable to either partnership.

(iii) Section 168(i)(7) transactions. If
any qualified property is transferred in a
transaction described in section 168(i)(7)
in the same taxable year that the qualified
property is placed in service or planted or
grafted, as applicable, by the transferor,
the additional first year depreciation de-
duction is allowable for the qualified
property. The allowable additional first

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year depreciation deduction for the quali-
fied property for the transferor's taxable
year in which the property is placed in
service or planted or grafted, as applica-
ble, is allocated between the transferor
and the transferee on a monthly basis.
This allocation shall be made in accor-
dance with the rules in § 1.168(d)-1(b)
(7)(ii) for allocating the depreciation de-
duction between the transferor and the
transferee. However, solely for purposes
of this section, if the qualified property is
transferred in a section 721(a) transaction
to a partnership that has as a partner a
person, other than the transferor, who pre-
viously had a depreciable interest in the
qualified property, in the same taxable
year that the qualified property is placed
in service or planted or grafted, as appli-
cable, by the transferor, the allowable ad-
ditional first year depreciation deduction
is allocated entirely to the transferor, and
not to the partnership. Additionally, if
qualified property is both placed in service
or planted or grafted, as applicable, and
transferred in a transaction described in
section 168(i)(7) by the transferor during
the same taxable year, and if such prop-
erty is disposed of by the transferee, other
than by a transaction described in section
168(i)(7), during the same taxable year the
transferee received such property from the
transferor, then no additional first year
depreciation deduction is allowable to ei-
ther party.

(iv) Examples. The application of this
paragraph (f)(1) is illustrated by the fol-
lowing examples:

Example 1. UU and VV are equal partners in
Partnership JL, a general partnership. Partnership
JL is a calendar-year taxpayer. On October 1, 2017,
Partnership JL purchased and placed in service qual-
ified property at a cost of $30,000. On November 1,
2017, UU sells its entire 50 percent interest to WW in
a transfer that terminates the partnership under sec-
tion 708(b)(1)(B). As a result, terminated Partner-
ship JL is deemed to have contributed the qualified
property to new Partnership JL. Pursuant to para-
graph (f)(1)(ii) of this section, new Partnership JL,
not terminated Partnership JL, is eligible to claim
the 100-percent additional first year depreciation de-
duction allowable for the qualified property for the
taxable year 2017, assuming all other requirements
are met.

Example 2. On January 5, 2018, XX purchased
and placed in service qualified property for a total
amount of $9,000. On August 20, 2018, XX trans-
ferred this qualified property to Partnership BC in a
transaction described in section 721(a). No other
partner of Partnership BC has ever had a depreciable
interest in the qualified property. XX and Partnership

BC are calendar-year taxpayers. Because the trans-
action between XX and Partnership BC is a transac-
tion described in section 168(i)(7), pursuant to para-
graph (f)(1)(iii) of this section, the 100-percent
additional first year depreciation deduction allow-
able for the qualified property is allocated between
XX and Partnership BC in accordance with the rules
in § 1.168(d)-1(b)(7)(ii) for allocating the deprecia-
tion deduction between the transferor and the trans-
feree. Accordingly, the 100-percent additional first
year depreciation deduction allowable of $9,000 for
the qualified property for 2018 is allocated between
XX and Partnership BC based on the number of
months that XX and Partnership BC held the quali-
fied property in service during 2018. Thus, because
the qualified property was held in service by XX for
7 of 12 months, which includes the month in which
XX placed the qualified property in service but does
not include the month in which the qualified property
was transferred, XX is allocated $5,250 ( 7/12 ×
$9,000 additional first year depreciation deduction).
Partnership BC is allocated $3,750, the remaining
5/12 of the $9,000 additional first year depreciation
deduction allowable for the qualified property.

(2) Redetermination of basis. If the un-
adjusted depreciable basis, as defined in
§ 1.168(b)-1(a)(3), of qualified property
is redetermined (for example, due to con-
tingent purchase price or discharge of in-
debtedness) before January 1, 2027, or in
the case of property described in section
168(k)(2)(B) or (C), is redetermined be-
fore January 1, 2028, the additional first
year depreciation deduction allowable for
the qualified property is redetermined as
follows:

(i) Increase in basis. For the taxable
year in which an increase in basis of qual-
ified property occurs, the taxpayer shall
claim an additional first year depreciation
deduction for qualified property by multi-
plying the amount of the increase in basis
for this property by the applicable per-
centage for the taxable year in which the
underlying property was placed in service
by the taxpayer. For purposes of this para-
graph (f)(2)(i), the additional first year
depreciation deduction applies to the in-
crease in basis only if the underlying
property is qualified property. To deter-
mine the amount otherwise allowable as a
depreciation deduction for the increase in
basis of qualified property, the amount of
the increase in basis of the qualified prop-
erty must be reduced by the additional
first year depreciation deduction allowed
or allowable, whichever is greater, for the
increase in basis and the remaining in-
crease in basis of-

(A) Qualified property, except for com-
puter software described in paragraph

(b)(2)(i)(B) of this section, is depreciated
over the recovery period of the qualified
property remaining as of the beginning of
the taxable year in which the increase in
basis occurs, and using the same depreci-
ation method and convention applicable to
the qualified property that applies for the
taxable year in which the increase in basis
occurs; and

(B) Computer software, as defined in
paragraph (b)(2)(i)(B) of this section,
that is qualified property is depreciated
ratably over the remainder of the 36-
month period, the useful life under sec-
tion 167(f)(1), as of the beginning of the
first day of the month in which the in-
crease in basis occurs.

(ii) Decrease in basis. For the taxable
year in which a decrease in basis of qual-
ified property occurs, the taxpayer shall
reduce the total amount otherwise allow-
able as a depreciation deduction for all of
the taxpayer's depreciable property by the
excess additional first year depreciation
deduction previously claimed for the qual-
ified property. If, for such taxable year,
the excess additional first year deprecia-
tion deduction exceeds the total amount
otherwise allowable as a depreciation de-
duction for all of the taxpayer's deprecia-
ble property, the taxpayer shall take into
account a negative depreciation deduction
in computing taxable income. The excess
additional first year depreciation deduc-
tion for qualified property is determined
by multiplying the amount of the decrease
in basis for this property by the applicable
percentage for the taxable year in which
the underlying property was placed in ser-
vice by the taxpayer. For purposes of this
paragraph (f)(2)(ii), the additional first
year depreciation deduction applies to the
decrease in basis only if the underlying
property is qualified property. Also, if the
taxpayer establishes by adequate records
or other sufficient evidence that the tax-
payer claimed less than the additional first
year depreciation deduction allowable for
the qualified property before the decrease
in basis, or if the taxpayer claimed more
than the additional first year depreciation
deduction allowable for the qualified
property before the decrease in basis, the
excess additional first year depreciation
deduction is determined by multiplying
the amount of the decrease in basis by the
additional first year depreciation deduc-

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tion percentage actually claimed by the
taxpayer for the qualified property before
the decrease in basis. To determine the
amount to reduce the total amount other-
wise allowable as a depreciation deduc-
tion for all of the taxpayer's depreciable
property for the excess depreciation pre-
viously claimed, other than the additional
first year depreciation deduction, resulting
from the decrease in basis of the qualified
property, the amount of the decrease in
basis of the qualified property must be
adjusted by the excess additional first year
depreciation deduction that reduced the
total amount otherwise allowable as a de-
preciation deduction, as determined under
this paragraph (f)(2)(ii), and the remaining
decrease in basis of-

(A) Qualified property, except for com-
puter software described in paragraph
(b)(2)(i)(B) of this section, reduces the
amount otherwise allowable as a depreci-
ation deduction over the recovery period
of the qualified property remaining as of
the beginning of the taxable year in which
the decrease in basis occurs, and using the
same depreciation method and convention
of the qualified property that applies in the
taxable year in which the decrease in basis
occurs. If, for any taxable year, the reduc-
tion to the amount otherwise allowable as
a depreciation deduction, as determined
under this paragraph (f)(2)(ii)(A), exceeds
the total amount otherwise allowable as a
depreciation deduction for all of the tax-
payer's depreciable property, the taxpayer
shall take into account a negative depre-
ciation deduction in computing taxable in-
come; and

(B) Computer software, as defined in
paragraph (b)(2)(i)(B) of this section, that
is qualified property reduces the amount
otherwise allowable as a depreciation de-
duction over the remainder of the 36-
month period, the useful life under section
167(f)(1), as of the beginning of the first
day of the month in which the decrease in
basis occurs. If, for any taxable year, the
reduction to the amount otherwise allow-
able as a depreciation deduction, as deter-
mined under this paragraph (f)(2)(ii)(B),
exceeds the total amount otherwise allow-
able as a depreciation deduction for all of
the taxpayer's depreciable property, the
taxpayer shall take into account a negative
depreciation deduction in computing tax-
able income.

(iii) Definitions. Except as otherwise
expressly provided by the Internal Reve-
nue Code (for example, section 1017(a)),
the regulations under the Internal Revenue
Code, or other guidance published in the
Internal Revenue Bulletin for purposes of
this paragraph (f)(2)-

(A) An increase in basis occurs in the
taxable year an amount is taken into ac-
count under section 461; and

(B) A decrease in basis occurs in the
taxable year an amount would be taken
into account under section 451.

(iv) Examples. The application of this
paragraph (f)(2) is illustrated by the fol-
lowing examples:

Example 1. (i) On May 15, 2023, YY, a cash-
basis taxpayer, purchased and placed in service
qualified property that is 5-year property at a cost
of $200,000. In addition to the $200,000, YY
agrees to pay the seller 25 percent of the gross
profits from the operation of the property in 2023.
On May 15, 2024, YY paid to the seller an addi-
tional $10,000. YY depreciates the 5-year property
placed in service in 2023 using the optional de-
preciation table that corresponds with the general
depreciation system, the 200-percent declining
balance method, a 5-year recovery period, and the
half-year convention.

(ii) For 2023, YY is allowed an 80-percent addi-
tional first year depreciation deduction of $160,000
(the unadjusted depreciable basis of $200,000 mul-
tiplied by 0.80). In addition, YY's depreciation de-
duction for 2023 for the remaining adjusted depre-
ciable basis of $40,000 (the unadjusted depreciable
basis of $200,000 reduced by the additional first year
depreciation deduction of $160,000) is $8,000 (the
remaining adjusted depreciable basis of $40,000
multiplied by the annual depreciation rate of 0.20 for
recovery year 1).

(iii) For 2024, YY's depreciation deduction for
the remaining adjusted depreciable basis of $40,000
is $12,800 (the remaining adjusted depreciable basis
of $40,000 multiplied by the annual depreciation rate
of 0.32 for recovery year 2). In addition, pursuant to
paragraph (f)(2)(i) of this section, YY is allowed an
additional first year depreciation deduction for 2024
for the $10,000 increase in basis of the qualified
property. Consequently, YY is allowed an additional
first year depreciation deduction of $8,000 (the in-
crease in basis of $10,000 multiplied by 0.80, the
applicable percentage for 2023). Also, YY is allowed
a depreciation deduction for 2024 attributable to the
remaining increase in basis of $2,000 (the increase in
basis of $10,000 reduced by the additional first year
depreciation deduction of $8,000). The depreciation
deduction allowable for 2024 attributable to the re-
maining increase in basis of $2,000 is $889 (the
remaining increase in basis of $2,000 multiplied by
0.4444, which is equal to 1/remaining recovery
period of 4.5 years at January 1, 2024, multiplied by
2). Accordingly, for 2024, YY's total depreciation
deduction allowable for the qualified property is
$21,689 ($12,800 plus $8,000 plus $889).

Example 2. (i) On May 15, 2023, ZZ, a calendar-
year taxpayer, purchased and placed in service qual-
ified property that is 5-year property at a cost of
$400,000. To purchase the property, ZZ borrowed
$250,000 from Bank1. On May 15, 2024, Bank1
forgives $50,000 of the indebtedness. ZZ makes the
election provided in section 108(b)(5) to apply any
portion of the reduction under section 1017 to the
basis of the depreciable property of the taxpayer. ZZ
depreciates the 5-year property placed in service in
2023 using the optional depreciation table that cor-
responds with the general depreciation system, the
200-percent declining balance method, a 5-year re-
covery period, and the half-year convention.

(ii) For 2023, ZZ is allowed an 80-percent addi-
tional first year depreciation deduction of $320,000
(the unadjusted depreciable basis of $400,000 mul-
tiplied by 0.80). In addition, ZZ's depreciation de-
duction allowable for 2023 for the remaining ad-
justed depreciable basis of $80,000 (the unadjusted
depreciable basis of $400,000 reduced by the addi-
tional first year depreciation deduction of $320,000)
is $16,000 (the remaining adjusted depreciable basis
of $80,000 multiplied by the annual depreciation rate
of 0.20 for recovery year 1).

(iii) For 2024, ZZ's deduction for the remaining
adjusted depreciable basis of $80,000 is $25,600 (the
remaining adjusted depreciable basis of $80,000
multiplied by the annual depreciation rate 0.32 for
recovery year 2). Although Bank1 forgave the in-
debtedness in 2024, the basis of the property is
reduced on January 1, 2025, pursuant to sections
108(b)(5) and 1017(a) under which basis is reduced
at the beginning of the taxable year following the
taxable year in which the discharge of indebtedness
occurs.

(iv) For 2025, ZZ's deduction for the remaining
adjusted depreciable basis of $80,000 is $15,360 (the
remaining adjusted depreciable basis of $80,000
multiplied by the annual depreciation rate 0.192 for
recovery year 3). However, pursuant to paragraph
(f)(2)(ii) of this section, ZZ must reduce the amount
otherwise allowable as a depreciation deduction for
2025 by the excess depreciation previously claimed
for the $50,000 decrease in basis of the qualified
property. Consequently, ZZ must reduce the amount
of depreciation otherwise allowable for 2025 by the
excess additional first year depreciation of $40,000
(the decrease in basis of $50,000 multiplied by 0.80,
the applicable percentage for 2023). Also, ZZ must
reduce the amount of depreciation otherwise allow-
able for 2025 by the excess depreciation attributable
to the remaining decrease in basis of $10,000 (the
decrease in basis of $50,000 reduced by the excess
additional first year depreciation of $40,000). The
reduction in the amount of depreciation otherwise
allowable for 2025 for the remaining decrease in
basis of $10,000 is $5,714 (the remaining decrease in
basis of $10,000 multiplied by 0.5714, which is
equal to (1/remaining recovery period of 3.5 years at
January 1, 2025) multiplied by 2). Accordingly, as-
suming the qualified property is the only depreciable
property owned by ZZ, for 2025, ZZ has a negative
depreciation deduction for the qualified property of
$30,354 ($15,360 minus $40,000 minus $5,714).

(3) Sections 1245 and 1250 deprecia-
tion recapture. For purposes of section
1245 and the regulations under section

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1245, the additional first year depreciation
deduction is an amount allowed or allow-
able for depreciation. Further, for pur-
poses of section 1250(b) and the regula-
tions under section 1250(b), the additional
first year depreciation deduction is not a
straight line method.

(4) Coordination with section 169. The
additional first year depreciation deduc-
tion is allowable in the placed-in-service
year of a certified pollution control facil-
ity, as defined in § 1.169-2(a), that is
qualified property even if the taxpayer
makes the election to amortize the certi-
fied pollution control facility under sec-
tion 169 and the regulations under section
169 in the certified pollution control facil-
ity's placed-in-service year.

(5) Like-kind exchanges and involun-
tary conversions-(i) Scope. The rules of
this paragraph (f)(5) apply to replacement
MACRS property or replacement com-
puter software that is qualified property at
the time of replacement provided the time
of replacement is after September 27,
2017, and before January 1, 2027; or, in
the case of replacement MACRS property
or replacement computer software that is
qualified property described in section
168(k)(2)(B) or (C), the time of replace-
ment is after September 27, 2017, and
before January 1, 2028.

(ii) Definitions. For purposes of this
paragraph (f)(5), the following definitions
apply:

(A) Replacement MACRS property has
the same meaning as that term is defined
in § 1.168(i)-6(b)(1).

(B) Relinquished MACRS property has
the same meaning as that term is defined
in § 1.168(i)-6(b)(2).

(C) Replacement computer software is
computer software, as defined in para-
graph (b)(2)(i)(B) of this section, in the
hands of the acquiring taxpayer that is
acquired for other computer software in a
like-kind exchange or in an involuntary
conversion.

(D) Relinquished computer software is
computer software that is transferred by
the taxpayer in a like-kind exchange or in
an involuntary conversion.

(E) Time of disposition has the same mean-
ing as that term is defined in § 1.168(i)-
6(b)(3) for relinquished MACRS property.
For relinquished computer software, time of
disposition is when the disposition of the re-

linquished computer software takes place
under the convention determined under
§ 1.167(a)-14(b).

(F) Except as provided in paragraph
(f)(5)(iv) of this section, the time of re-
placement has the same meaning as that
term is defined in § 1.168(i)-6(b)(4) for
replacement MACRS property. For re-
placement computer software, the time of
replacement is, except as provided in
paragraph (f)(5)(iv) of this section, the
later of-

(1) When the replacement computer
software is placed in service under the
convention determined under § 1.167(a)-
14(b); or

(2) The time of disposition of the re-
linquished property.

(G) Exchanged basis has the same mean-
ing as that term is defined in § 1.168(i)-
6(b)(7) for MACRS property, as defined in
§ 1.168(b)-1(a)(2). For computer software,
the exchanged basis is determined after the
amortization deductions for the year of dis-
position are determined under § 1.167(a)-
14(b) and is the lesser of-

(1) The basis in the replacement com-
puter software, as determined under sec-
tion 1031(d) and the regulations under
section 1031(d), or section 1033(b) and
the regulations under section 1033(b); or

(2) The adjusted depreciable basis of
the relinquished computer software.

(H) Excess basis has the same meaning
as that term is defined in § 1.168(i)-
6(b)(8) for replacement MACRS prop-
erty. For replacement computer software,
the excess basis is any excess of the basis
in the replacement computer software, as
determined under section 1031(d) and the
regulations under section 1031(d), or sec-
tion 1033(b) and the regulations under
section 1033(b), over the exchanged basis
as determined under paragraph (f)(5)(ii)
(G) of this section.

(I) Remaining exchanged basis is the
exchanged basis as determined under
paragraph (f)(5)(ii)(G) of this section re-
duced by-

(1) The percentage of such basis attrib-
utable to the taxpayer's use of property for
the taxable year other than in the taxpay-
er's trade or business or for the production
of income; and

(2) Any adjustments to basis provided
by other provisions of the Code and the
regulations under the Code (including sec-

tion 1016(a)(2) and (3)) for periods prior
to the disposition of the relinquished prop-
erty.

(J) Remaining excess basis is the ex-
cess basis as determined under paragraph
(f)(5)(ii)(H) of this section reduced by-

(1) The percentage of such basis attrib-
utable to the taxpayer's use of property for
the taxable year other than in the taxpay-
er's trade or business or for the production
of income;

(2) Any portion of the basis the tax-
payer properly elects to treat as an ex-
pense under section 179 or 179C; and

(3) Any adjustments to basis provided
by other provisions of the Code and the
regulations under the Code.

(K) Year of disposition has the same
meaning as that term is defined in
§ 1.168(i)-6(b)(5).

(L) Year of replacement has the same
meaning as that term is defined in
§ 1.168(i)-6(b)(6).

(M) Like-kind exchange has the same
meaning as that term is defined in § 1.168(i)-
6(b)(11).

(N) Involuntary conversion has the
same meaning as that term is defined in
§ 1.168(i)-6(b)(12).

(iii) Computation-(A) In general. If
the replacement MACRS property or the
replacement computer software, as appli-
cable, meets the original use requirement
in paragraph (b)(3)(ii) of this section and
all other requirements of section 168(k)
and this section, the remaining exchanged
basis for the year of replacement and the
remaining excess basis, if any, for the year
of replacement for the replacement MACRS
property or the replacement computer soft-
ware, as applicable, are eligible for the ad-
ditional first year depreciation deduction. If
the replacement MACRS property or the
replacement computer software, as applica-
ble, meets the used property acquisition re-
quirements in paragraph (b)(3)(iii) of this
section and all other requirements of section
168(k) and this section, only the remaining
excess basis for the year of replacement for
the replacement MACRS property or the
replacement computer software, as applica-
ble, is eligible for the additional first year
depreciation deduction. See paragraph (b)
(3)(iii)(A)(3) of this section. The additional
first year depreciation deduction applies to
the remaining exchanged basis and any re-
maining excess basis, as applicable, of the

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replacement MACRS property or the re-
placement computer software, as applica-
ble, if the time of replacement is after
September 27, 2017, and before January
1, 2027; or, in the case of replacement
MACRS property or replacement com-
puter software, as applicable, described
in section 168(k)(2)(B) or (C), the time
of replacement is after September 27,
2017, and before January 1, 2028. The
additional first year depreciation deduc-
tion is computed separately for the re-
maining exchanged basis and any re-
maining excess basis, as applicable.

(B) Year of disposition and year of
replacement. The additional first year de-
preciation deduction is allowable for the
replacement MACRS property or replace-
ment computer software in the year of
replacement. However, the additional first
year depreciation deduction is not allow-
able for the relinquished MACRS property
or the relinquished computer software, as
applicable, if the relinquished MACRS
property or the relinquished computer soft-
ware, as applicable, is placed in service and
disposed of in a like-kind exchange or in an
involuntary conversion in the same taxable
year.

(C) Property described in section
168(k)(2)(B). For purposes of paragraph
(f)(5)(iii)(A) of this section, the total of
the remaining exchanged basis and the
remaining excess basis, if any, of the
replacement MACRS property that is
qualified property described in section
168(k)(2)(B) and meets the original use
requirement in paragraph (b)(3)(ii) of this
section is limited to the total of the prop-
erty's remaining exchanged basis and re-
maining excess basis, if any, attributable
to the property's manufacture, construc-
tion, or production after September 27,
2017, and before January 1, 2027. For
purposes of paragraph (f)(5)(iii)(A) of this
section, the remaining excess basis, if any,
of the replacement MACRS property that
is qualified property described in section
168(k)(2)(B) and meets the used property
acquisition requirements in paragraph
(b)(3)(iii) of this section is limited to the
property's remaining excess basis, if any,
attributable to the property's manufacture,
construction, or production after Septem-
ber 27, 2017, and before January 1, 2027.

(D) Effect of § 1.168(i)-6(i)(1) elec-
tion. If a taxpayer properly makes the

election under § 1.168(i)-6(i)(1) not to
apply § 1.168(i)-6 for any MACRS prop-
erty, as defined in § 1.168(b)-1(a)(2), in-
volved in a like-kind exchange or invol-
untary conversion and either of the
following:

(1) The replacement MACRS property
meets the original use requirement in
paragraph (b)(3)(ii) of this section and all
other requirements of section 168(k) and
this section, the total of the exchanged
basis, as defined in § 1.168(i)-6(b)(7),
and the excess basis, as defined in
§ 1.168(i)-6(b)(8), if any, in the replace-
ment MACRS property is eligible for the
additional first year depreciation deduc-
tion; or

(2) The replacement MACRS property
meets the used property acquisition re-
quirements in paragraph (b)(3)(iii) of this
section and all other requirements of sec-
tion 168(k) and this section, only the ex-
cess basis, as defined in § 1.168(i)-
6(b)(8), if any, in the replacement
MACRS property is eligible for the addi-
tional first year depreciation deduction.

(E) Alternative minimum tax. The ad-
ditional first year depreciation deduction
is allowed for alternative minimum tax
purposes for the year of replacement of
replacement MACRS property or replace-
ment computer software, as applicable,
that is qualified property. If the replace-
ment MACRS property or the replace-
ment computer software, as applicable,
meets the original use requirement in
paragraph (b)(3)(ii) of this section and all
other requirements of section 168(k) and
this section, the additional first year de-
preciation deduction for alternative mini-
mum tax purposes is based on the remain-
ing exchanged basis and the remaining
excess basis, if any, of the replacement
MACRS property or the replacement
computer software, as applicable, for al-
ternative minimum tax purposes. If the
replacement MACRS property or the re-
placement computer software, as applica-
ble, meets the used property acquisition
requirements in paragraph (b)(3)(iii) of
this section and all other requirements of
section 168(k) and this section, the addi-
tional first year depreciation deduction for
alternative minimum tax purposes is
based on the remaining excess basis, if
any, of the replacement MACRS property
or the replacement computer software, as

applicable, for alternative minimum tax
purposes.

(iv) Replacement MACRS property or
replacement computer software that is ac-
quired and placed in service before dis-
position of relinquished MACRS property
or relinquished computer software. If, in
an involuntary conversion, a taxpayer ac-
quires and places in service the replace-
ment MACRS property or the replace-
ment computer software, as applicable,
before the time of disposition of the in-
voluntarily converted MACRS property
or the involuntarily converted computer
software, as applicable; and the time of
disposition of the involuntarily converted
MACRS property or the involuntarily
converted computer software, as applica-
ble, is after December 31, 2026, or, in the
case of property described in service
168(k)(2)(B) or (C), after December 31,
2027, then-

(A) The time of replacement for pur-
poses of this paragraph (f)(5) is when the
replacement MACRS property or replace-
ment computer software, as applicable, is
placed in service by the taxpayer, pro-
vided the threat or imminence of requisi-
tion or condemnation of the involuntarily
converted MACRS property or involun-
tarily converted computer software, as ap-
plicable, existed before January 1, 2027,
or, in the case of property described in
section 168(k)(2)(B) or (C), existed before
January 1, 2028; and

(B) The taxpayer depreciates the re-
placement MACRS property or replace-
ment computer software, as applicable, in
accordance with paragraph (d) of this sec-
tion. However, at the time of disposition
of the involuntarily converted MACRS
property, the taxpayer determines the ex-
changed basis, as defined in § 1.168(i)-
6(b)(7), and the excess basis, as defined in
§ 1.168(i)-6(b)(8), of the replacement
MACRS property and begins to depreci-
ate the depreciable exchanged basis, as
defined in § 1.168(i)-6(b)(9), of the
replacement MACRS property in accor-
dance with § 1.168(i)-6(c). The deprecia-
ble excess basis, as defined in § 1.168(i)-
6(b)(10), of the replacement MACRS
property continues to be depreciated by
the taxpayer in accordance with the first
sentence of this paragraph (f)(5)(iv)(B).
Further, in the year of disposition of the
involuntarily converted MACRS prop-

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erty, the taxpayer must include in taxable
income the excess of the depreciation de-
ductions allowable, including the addi-
tional first year depreciation deduction al-
lowable, on the unadjusted depreciable
basis of the replacement MACRS property
over the additional first year depreciation
deduction that would have been allowable
to the taxpayer on the remaining exchanged
basis of the replacement MACRS property
at the time of replacement, as defined in
paragraph (f)(5)(v)(A) of this section, plus
the depreciation deductions that would have
been allowable, including the additional first
year depreciation deduction allowable, to
the taxpayer on the depreciable excess basis
of the replacement MACRS property from
the date the replacement MACRS property
was placed in service by the taxpayer, tak-
ing into account the applicable convention,
to the time of disposition of the involun-
tarily converted MACRS property. Similar
rules apply to replacement computer soft-
ware.

(v) Examples. The application of this
paragraph (f)(5) is illustrated by the fol-
lowing examples:

Example 1. (i) In April 2016, CSK, a calendar-
year corporation, acquired for $200,000 and placed
in service Canopy V1, a gas station canopy. Canopy
V1 is qualified property under section 168(k)(2), as
in effect on the day before amendment by the Act,
and is 5-year property under section 168(e). CSK
depreciated Canopy V1 under the general deprecia-
tion system of section 168(a) by using the 200-
percent declining balance method of depreciation, a
5-year recovery period, and the half-year conven-
tion. CSK elected to use the optional depreciation
tables to compute the depreciation allowance for
Canopy V1. In November 2017, Canopy V1 was
destroyed in a fire and was no longer usable in
CSK's business. In December 2017, in an invol-
untary conversion, CSK acquired and placed in
service Canopy W1 with all of the $160,000 of
insurance proceeds CSK received due to the loss of
Canopy V1. Canopy W1 is qualified property un-
der section 168(k)(2) and this section, and is
5-year property under section 168(e). Canopy W1
also meets the original use requirement in para-
graph (b)(3)(ii) of this section. CSK did not make
the election under § 1.168(i)-6(i)(1).

(ii) For 2016, CSK is allowed a 50-percent addi-
tional first year depreciation deduction of $100,000
for Canopy V1 (the unadjusted depreciable basis of
$200,000 multiplied by 0.50), and a regular MACRS
depreciation deduction of $20,000 for Canopy
V1 (the remaining adjusted depreciable basis of
$100,000 multiplied by the annual depreciation rate
of 0.20 for recovery year 1).

(iii) For 2017, CSK is allowed a regular MACRS
depreciation deduction of $16,000 for Canopy V1
(the remaining adjusted depreciable basis of

$100,000 multiplied by the annual depreciation rate
of 0.32 for recovery year 2 X1/2 year).

(iv) Pursuant to paragraph (f)(5)(iii)(A) of this
section, the additional first year depreciation deduc-
tion allowable for Canopy W1 for 2017 equals
$64,000 (100 percent of Canopy W1's remaining
exchanged basis at the time of replacement of
$64,000 (Canopy V1's remaining adjusted deprecia-
ble basis of $100,000 minus 2016 regular MACRS
depreciation deduction of $20,000 minus 2017 reg-
ular MACRS depreciation deduction of $16,000)).

Example 2. (i) The facts are the same as in
Example 1 of this paragraph (f)(5)(v), except CSK
elected not to deduct the additional first year depre-
ciation for 5-year property placed in service in 2016.
CSK deducted the additional first year depreciation
for 5-year property placed in service in 2017.

(ii) For 2016, CSK is allowed a regular MACRS
depreciation deduction of $40,000 for Canopy V1
(the unadjusted depreciable basis of $200,000 mul-
tiplied by the annual depreciation rate of 0.20 for
recovery year 1).

(iii) For 2017, CSK is allowed a regular MACRS
depreciation deduction of $32,000 for Canopy V1
(the unadjusted depreciable basis of $200,000 mul-
tiplied by the annual depreciation rate of 0.32 for
recovery year 2 × 1/2 year).

(iv) Pursuant to paragraph (f)(5)(iii)(A) of this
section, the additional first year depreciation deduc-
tion allowable for Canopy W1 for 2017 equals
$128,000 (100 percent of Canopy W1's remaining
exchanged basis at the time of replacement of
$128,000 (Canopy V1's unadjusted depreciable ba-
sis of $200,000 minus 2016 regular MACRS depre-
ciation deduction of $40,000 minus 2017 regular
MACRS depreciation deduction of $32,000)).

Example 3. The facts are the same as in Example
1 of this paragraph (f)(5)(v), except Canopy W1
meets the used property acquisition requirements in
paragraph (b)(3)(iii) of this section. Because the
remaining excess basis of Canopy W1 is zero, CSK
is not allowed any additional first year depreciation
for Canopy W1 pursuant to paragraph (f)(5)(iii)(A)
of this section.

Example 4. (i) In December 2016, AB, a
calendar-year corporation, acquired for $10,000 and
placed in service Computer X2. Computer X2 is
qualified property under section 168(k)(2), as in ef-
fect on the day before amendment by the Act, and is
5-year property under section 168(e). AB depreciated
Computer X2 under the general depreciation system
of section 168(a) by using the 200-percent declining
balance method of depreciation, a 5-year recovery
period, and the half-year convention. AB elected to
use the optional depreciation tables to compute the
depreciation allowance for Computer X2. In Novem-
ber 2017, AB acquired Computer Y2 by exchanging
Computer X2 and $1,000 cash in a like-kind ex-
change. Computer Y2 is qualified property under
section 168(k)(2) and this section, and is 5-year
property under section 168(e). Computer Y2 also
meets the original use requirement in paragraph
(b)(3)(ii) of this section. AB did not make the elec-
tion under § 1.168(i)-6(i)(1).

(ii) For 2016, AB is allowed a 50-percent addi-
tional first year depreciation deduction of $5,000 for
Computer X2 (unadjusted basis of $10,000 multi-
plied by 0.50), and a regular MACRS depreciation

deduction of $1,000 for Computer X2 (the remain-
ing adjusted depreciable basis of $5,000 multi-
plied by the annual depreciation rate of 0.20 for
recovery year 1).

(iii) For 2017, AB is allowed a regular MACRS
depreciation deduction of $800 for Computer X2
(the remaining adjusted depreciable basis of $5,000
multiplied by the annual depreciation rate of 0.32 for
recovery year 2 × 1/2 year).

(iv) Pursuant to paragraph (f)(5)(iii)(A) of this
section, the 100-percent additional first year de-
preciation deduction for Computer Y2 for 2017 is
allowable for the remaining exchanged basis at the
time of replacement of $3,200 (Computer X2's
unadjusted depreciable basis of $10,000 minus
additional first year depreciation deduction allow-
able of $5,000 minus the 2016 regular MACRS
depreciation deduction of $1,000 minus the 2017
regular MACRS depreciation deduction of $800)
and for the remaining excess basis at the time of
replacement of $1,000 (cash paid for Computer
Y2). Thus, the 100-percent additional first year
depreciation deduction allowable for Computer
Y2 totals $4,200 for 2017.

Example 5. (i) In July 2017, BC, a calendar-year
corporation, acquired for $20,000 and placed in ser-
vice Equipment X3. Equipment X3 is qualified prop-
erty under section 168(k)(2), as in effect on the day
before amendment by the Act, and is 5-year property
under section 168(e). BC depreciated Equipment X3
under the general depreciation system of section
168(a) by using the 200-percent declining balance
method of depreciation, a 5-year recovery period,
and the half-year convention. BC elected to use the
optional depreciation tables to compute the depreci-
ation allowance for Equipment X3. In December
2017, BC acquired Equipment Y3 by exchanging
Equipment X3 and $5,000 cash in a like-kind ex-
change. Equipment Y3 is qualified property under
section 168(k)(2) and this section, and is 5-year
property under section 168(e). Equipment Y3 also
meets the used property acquisition requirements in
paragraph (b)(3)(iii) of this section. BC did not make
the election under § 1.168(i)-6(i)(1).

(ii) Pursuant to § 1.168(k)-1(f)(5)(iii)(B), no ad-
ditional first year depreciation deduction is allowable
for Equipment X3 and, pursuant to § 1.168(d)-
1(b)(3)(ii), no regular depreciation deduction is al-
lowable for Equipment X3, for 2017.

(iii) Pursuant to paragraph (f)(5)(iii)(A) of this
section, no additional first year depreciation deduc-
tion is allowable for Equipment Y3's remaining ex-
changed basis at the time of replacement of $20,000
(Equipment X3's unadjusted depreciable basis of
$20,000). However, pursuant to paragraph (f)(5)(iii)(A)
of this section, the 100-percent additional first year
depreciation deduction is allowable for Equipment
Y3's remaining excess basis at the time of replacement
of $5,000 (cash paid for Equipment Y3). Thus, the
100-percent additional first year depreciation deduction
allowable for Equipment Y3 is $5,000 for 2017.

Example 6. (i) The facts are the same as in
Example 5 of this paragraph (f)(5)(v), except BC
properly makes the election under § 1.168(i)-6(i)(1)
not to apply § 1.168(i)-6 to Equipment X3 and
Equipment Y3.

(ii) Pursuant to § 1.168(k)-1(f)(5)(iii)(B), no ad-
ditional first year depreciation deduction is allowable

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for Equipment X3 and, pursuant to § 1.168(d)-
1(b)(3)(ii), no regular depreciation deduction is al-
lowable for Equipment X3, for 2017.

(iii) Pursuant to § 1.168(i)-6(i)(1), BC is treated as
placing Equipment Y3 in service in December 2017
with a basis of $25,000 (the total of the exchanged
basis of $20,000 and the excess basis of $5,000). How-
ever, pursuant to paragraph (f)(5)(iii)(D)(2) of this sec-
tion, the 100-percent additional first year depreciation
deduction is allowable only for Equipment Y3's excess
basis at the time of replacement of $5,000 (cash paid
for Equipment Y3). Thus, the 100-percent additional
first year depreciation deduction allowable for Equip-
ment Y3 is $5,000 for 2017.

(6) Change in use-(i) Change in use
of depreciable property. The determina-
tion of whether the use of depreciable
property changes is made in accordance
with section 168(i)(5) and § 1.168(i)-4.

(ii) Conversion to personal use. If
qualified property is converted from busi-
ness or income-producing use to personal
use in the same taxable year in which the
property is placed in service by a tax-
payer, the additional first year deprecia-
tion deduction is not allowable for the
property.

(iii) Conversion to business or
income-producing use-(A) During the
same taxable year. If, during the same
taxable year, property is acquired by a
taxpayer for personal use and is con-
verted by the taxpayer from personal use
to business or income-producing use,
the additional first year depreciation de-
duction is allowable for the property in
the taxable year the property is con-
verted to business or income-producing
use, assuming all of the requirements in
paragraph (b) of this section are met.
See paragraph (b)(3)(ii) of this section
relating to the original use rules for a
conversion of property to business or
income-producing use.

(B) Subsequent to the acquisition year.
If property is acquired by a taxpayer for
personal use and, during a subsequent tax-
able year, is converted by the taxpayer
from personal use to business or income-
producing use, the additional first year
depreciation deduction is allowable for
the property in the taxable year the prop-
erty is converted to business or income-
producing use, assuming all of the re-
quirements in paragraph (b) of this section
are met. For purposes of paragraphs (b)(4)
and (5) of this section, the property must
be acquired by the taxpayer for personal
use after September 27, 2017, and con-

verted by the taxpayer from personal use
to business or income-producing use by
January 1, 2027. See paragraph (b)(3)(ii)
of this section relating to the original use
rules for a conversion of property to busi-
ness or income-producing use.

(iv) Depreciable property changes use
subsequent to the placed-in-service year-
(A) If the use of qualified property changes
in the hands of the same taxpayer subse-
quent to the taxable year the qualified prop-
erty is placed in service and, as a result of
the change in use, the property is no longer
qualified property, the additional first year
depreciation deduction allowable for the
qualified property is not redetermined.

(B) If depreciable property is not qual-
ified property in the taxable year the prop-
erty is placed in service by the taxpayer,
the additional first year depreciation de-
duction is not allowable for the property
even if a change in the use of the property
subsequent to the taxable year the prop-
erty is placed in service results in the
property being qualified property in the
taxable year of the change in use.

(v) Examples. The application of this
paragraph (f)(6) is illustrated by the fol-
lowing examples:

Example 1. (i) On January 1, 2019, FFF, a cal-
endar year corporation, purchased and placed in ser-
vice several new computers at a total cost of
$100,000. FFF used these computers within the
United States for 3 months in 2019 and then moved
and used the computers outside the United States for
the remainder of 2019. On January 1, 2020, FFF
permanently returns the computers to the United
States for use in its business.

(ii) For 2019, the computers are considered as
used predominantly outside the United States in
2019 pursuant to § 1.48-1(g)(1)(i). As a result, the
computers are required to be depreciated under the
alternative depreciation system of section 168(g).
Pursuant to paragraph (b)(2)(ii)(B) of this section,
the computers are not qualified property in 2019,
the placed-in-service year. Thus, pursuant to para-
graph (f)(6)(iv)(B) of this section, no additional
first year depreciation deduction is allowed for
these computers, regardless of the fact that the
computers are permanently returned to the United
States in 2020.

Example 2. (i) On February 8, 2023, GGG, a
calendar year corporation, purchased and placed in
service new equipment at a cost of $1,000,000 for
use in its California plant. The equipment is 5-year
property under section 168(e) and is qualified prop-
erty under section 168(k). GGG depreciates its
5-year property placed in service in 2023 using the
optional depreciation table that corresponds with the
general depreciation system, the 200-percent declin-
ing balance method, a 5-year recovery period, and
the half-year convention. On June 4, 2024, due to
changes in GGG's business circumstances, GGG

permanently moves the equipment to its plant in
Mexico.

(ii) For 2023, GGG is allowed an 80-percent
additional first year depreciation deduction of
$800,000 (the adjusted depreciable basis of
$1,000,000 multiplied by 0.80). In addition, GGG's
depreciation deduction allowable in 2023 for the
remaining adjusted depreciable basis of $200,000
(the unadjusted depreciable basis of $1,000,000 re-
duced by the additional first year depreciation de-
duction of $800,000) is $40,000 (the remaining
adjusted depreciable basis of $200,000 multiplied
by the annual depreciation rate of 0.20 for recov-
ery year 1).

(iii) For 2024, the equipment is considered as
used predominantly outside the United States pursu-
ant to § 1.48-1(g)(1)(i). As a result of this change in
use, the adjusted depreciable basis of $160,000 for
the equipment is required to be depreciated under the
alternative depreciation system of section 168(g) be-
ginning in 2024. However, the additional first year
depreciation deduction of $800,000 allowed for the
equipment in 2023 is not redetermined.

(7) Earnings and profits. The addi-
tional first year depreciation deduction is
not allowable for purposes of computing
earnings and profits.

(8) Limitation of amount of deprecia-
tion for certain passenger automobiles.
For a passenger automobile as defined in
section 280F(d)(5), the limitation under
section 280F(a)(1)(A)(i) is increased by
$8,000 for qualified property acquired and
placed in service by a taxpayer after Sep-
tember 27, 2017.

(9) Coordination with section 47-(i)
In general. If qualified rehabilitation ex-
penditures, as defined in section 47(c)(2)
and § 1.48-12(c), incurred by a taxpayer
with respect to a qualified rehabilitated
building, as defined in section 47(c)(1)
and § 1.48-12(b), are qualified property,
the taxpayer may claim the rehabilitation
credit provided by section 47(a), provided
the requirements of section 47 are met-

(A) With respect to the portion of the
basis of the qualified rehabilitated build-
ing that is attributable to the qualified
rehabilitation expenditures if the tax-
payer makes the applicable election un-
der paragraph (e)(1)(i) of this section
not to deduct any additional first year
depreciation for the class of property
that includes the qualified rehabilitation
expenditures; or

(B) With respect to the portion of the
remaining rehabilitated basis of the qualified
rehabilitated building that is attributable to
the qualified rehabilitation expenditures if
the taxpayer claims the additional first year
depreciation deduction on the unadjusted

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depreciable basis, as defined in § 1.168(b)-
1(a)(3) but before the reduction in basis for
the amount of the rehabilitation credit, of the
qualified rehabilitation expenditures; and
the taxpayer depreciates the remaining ad-
justed depreciable basis, as defined in para-
graph (d)(2)(i) of this section, of such ex-
penditures using straight line cost recovery
in accordance with section 47(c)(2)(B)(i)
and § 1.48-12(c)(7)(i). For purposes of this
paragraph (f)(9)(i)(B), the remaining reha-
bilitated basis is equal to the unadjusted
depreciable basis, as defined in § 1.168(b)-
1(a)(3) but before the reduction in basis for
the amount of the rehabilitation credit, of the
qualified rehabilitation expenditures that are
qualified property reduced by the additional
first year depreciation allowed or allowable,
whichever is greater.

(ii) Example. The application of this
paragraph (f)(9) is illustrated by the fol-
lowing example:

Example. (i) Between February 8, 2023, and
June 4, 2023, JM, a calendar-year taxpayer, in-
curred qualified rehabilitation expenditures of
$200,000 with respect to a qualified rehabilitated
building that is nonresidential real property under
section 168(e). These qualified rehabilitation ex-
penditures are qualified property and qualify for
the 20-percent rehabilitation credit under section
47(a)(1). JM's basis in the qualified rehabilitated
building is zero before incurring the qualified re-
habilitation expenditures and JM placed the qual-
ified rehabilitated building in service in July 2023.
JM depreciates its nonresidential real property
placed in service in 2023 under the general depre-
ciation system of section 168(a) by using the
straight line method of depreciation, a 39-year
recovery period, and the mid-month convention.
JM elected to use the optional depreciation tables
to compute the depreciation allowance for its de-
preciable property placed in service in 2023. Fur-
ther, for 2023, JM did not make any election under
paragraph (e) of this section.

(ii) Because JM did not make any election under
paragraph (e) of this section, JM is allowed an 80-
percent additional first year depreciation deduction
of $160,000 for the qualified rehabilitation expendi-
tures for 2023 (the unadjusted depreciable basis of
$200,000 (before reduction in basis for the rehabil-
itation credit) multiplied by 0.80). JM also is allowed
to claim a rehabilitation credit of $8,000 for the
remaining rehabilitated basis of $40,000 (the unad-
justed depreciable basis (before reduction in basis
for the rehabilitation credit) of $200,000 less the
additional first year depreciation deduction of
$160,000, multiplied by 0.20 to calculate the reha-
bilitation credit). For 2023, the ratable share of the
rehabilitation credit of $8,000 is $1,600. Further,
JM's depreciation deduction for 2023 for the remain-
ing adjusted depreciable basis of $32,000 (the unad-
justed depreciable basis (before reduction in basis
for the rehabilitation credit) of $200,000 less the
additional first year depreciation deduction of

$160,000 less the rehabilitation credit of $8,000) is
$376.64 (the remaining adjusted depreciable basis of
$32,000 multiplied by the depreciation rate of
0.01177 for recovery year 1, placed in service in
month 7).

(10) Coordination with section 514(a)(3).
The additional first year depreciation deduc-
tion is not allowable for purposes of section
514(a)(3).

(g) Applicability dates-(1) In general.
Except as provided in paragraph (g)(2) of
this section, the rules of this section apply
to-

(i) Qualified property under section
168(k)(2) that is placed in service by the
taxpayer during or after the taxpayer's
taxable year that includes the date of pub-
lication of a Treasury decision adopting
these rules as final regulations in the Fed-
eral Register; and

(ii) A specified plant for which the
taxpayer properly made an election to ap-
ply 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 includes the
date of publication of a Treasury decision
adopting these rules as final regulations in
the Federal Register.

(2) Early application. A taxpayer may
rely on the provisions of this section in
these proposed regulations for-

(i) Qualified property under section
168(k)(2) acquired and placed in service
after September 27, 2017, by the tax-
payer during taxable years ending on or
after September 28, 2017, and ending
before the taxpayer's taxable year that
includes the date of publication of a
Treasury decision adopting these rules
as final regulations in the Federal Reg-
ister; and

(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, after September 27,
2017, by the taxpayer during taxable
years ending on or after September 28,
2017, and ending before the taxpayer's
taxable year that includes the date
of publication of a Treasury decision
adopting these rules as final regulations
in the Federal Register.

Par. 10. Section 1.169-3 is amended
by adding a sentence at the end of para-
graph (a) and adding two sentences at the
end of paragraph (g) to read as follows:

§ 1.169-3 Amortizable basis.

(a) *** Further, before computing the
amortization deduction allowable under
section 169, the adjusted basis for purposes
of determining gain for a facility that is
acquired and placed in service after Septem-
ber 27, 2017, and that is qualified property
under section 168(k), as amended by the
Tax Cuts and Jobs Act, Public Law 115-97
(131 Stat. 2054 (December 22, 2017)) (the
"Act"), or § 1.168(k)-2, must be reduced by
the amount of the additional first year de-
preciation deduction allowed or allowable,
whichever is greater, under section 168(k),
as amended by the Act.

* * * * *

(g) * * * The last sentence of paragraph
(a) of this section applies to a certified
pollution control facility that is qualified
property under section 168(k)(2) and
placed in service by a taxpayer during or
after the taxpayer's taxable year that in-
cludes the date of publication of a Trea-
sury decision adopting these rules as final
regulations in the Federal Register. How-
ever, a taxpayer may rely on the last sen-
tence in paragraph (a) of this section in
these proposed regulations for a certified
pollution control facility that is qualified
property under section 168(k)(2) and ac-
quired and placed in service after Septem-
ber 27, 2017, by the taxpayer during tax-
able years ending on or after September
28, 2017, and ending before the taxpay-
er's taxable year that includes the date of
publication of a Treasury decision adopt-
ing these rules as final regulations in the
Federal Register.

Par. 11. Section 1.179-4 is amended
by revising paragraph (c)(2) to read as
follows:

§ 1.179-4 Definitions.

* * * * *

(c) * * *

(2) Property deemed to have been ac-
quired by a new target corporation as a
result of a section 338 election (relating to
certain stock purchases treated as asset
acquisitions) or a section 336(e) election
(relating to certain stock dispositions
treated as asset transfers) will be consid-
ered acquired by purchase.

* * * * *

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Par. 12. Section 1.179-6 is amended
by revising the first sentence in paragraph
(a) and adding paragraph (e) to read as
follows:

##### § 1.179-6 Effective/applicability dates.

(a) * * * Except as provided in para-
graphs (b), (c), (d), and (e) of this section,
the provisions of §§ 1.179-1 through
1.179-5 apply for property placed in ser-
vice by the taxpayer in taxable years end-
ing after January 25, 1993. * * *

* * * * *

(e) Application of § 1.179-4(c)(2)-(1)
In general. Except as provided in para-
graph (e)(2) of this section, the provisions
of § 1.179-4(c)(2) relating to section
336(e) are applicable on or after the date
of publication of a Treasury decision
adopting these rules as final regulations in
the Federal Register.

(2) Early application. A taxpayer may
rely on the provisions of § 1.179-4(c)(2)
relating to section 336(e) in these pro-
posed regulations for the taxpayer's tax-
able years ending on or after September
28, 2017, and ending before the date of
publication of a Treasury decision adopt-
ing these rules as final regulations in the
Federal Register.

Par. 13. Section 1.312-15 is amended
by adding a sentence at the end of para-
graph (a)(1) and adding paragraph (e) to
read as follows:

§ 1.312-15 Effect of depreciation on
earnings and profits.

(a) * * *

(1) * * * Further, see § 1.168(k)-
2(f)(7) with respect to the treatment of the
additional first year depreciation deduc-
tion allowable under section 168(k), as
amended by the Tax Cuts and Jobs Act,
Public Law 115-97 (131 Stat. 2054 (De-
cember 22, 2017)), for purposes of com-
puting the earnings and profits of a corpo-
ration.

* * * * *

(e) Applicability date of qualified prop-
erty. The last sentence of paragraph (a) of
this section applies to the taxpayer's tax-
able years ending on or after the date of
publication of a Treasury decision adopt-
ing these rules as final regulations in the
Federal Register. However, a taxpayer

may rely on the last sentence in paragraph
(a) of this section in these proposed reg-
ulations for the taxpayer's taxable years
ending on or after September 28, 2017,
and ending before the taxpayer's taxable
year that includes the date of publication
of a Treasury decision adopting these
rules as final regulations in the Federal
Register.

Par. 14. Section 1.704-1 is amended
by adding two sentences at the end of
paragraph (b)(1)(ii)(a) and adding a sen-
tence at the end of paragraph (b)(2)(iv)
(g)(3) to read as follows:

§ 1.704-1 Partner's distributive share.

* * * * *

(b) * * *

(1) * * *

(ii) * * *

(a) * * * The last sentence of paragraph
(b)(2)(iv)(g)(3) of this section is applica-
ble for partnership taxable years ending
on or after the date of publication of a
Treasury decision adopting these rules as
final regulations in the Federal Register.
However, a partnership may rely on the
last sentence in paragraph (b)(2)(iv)(g)(3)
of this section in these proposed regula-
tions for the partnership's taxable years
ending on or after September 28, 2017,
and ending before the partnership's tax-
able year that includes the date of publi-
cation of a Treasury decision adopting
these rules as final regulations in the Fed-
eral Register.

* * * * *

(2) * * *

(iv) * * *

(g) * * *

(3) * * * For purposes of the preceding
sentence, additional first year depreciation
deduction under section 168(k) is not a
reasonable method.

* * * * *

Par. 15. Section 1.704-3 is amended
by:

1\. Adding a sentence at the end of
paragraph (d)(2);

2\. Revising the first sentence in para-
graph (f); and

3\. Adding two sentences at the end of
paragraph (f).

The additions and revision read as fol-
lows:

§ 1.704-3 Contributed property.

* * * * *

(d) * * *

(2) * * * However, the additional first
year depreciation deduction under section
168(k) is not a permissible method for
purposes of the preceding sentence and, if
a partnership has acquired property in a
taxable year for which the additional first
year depreciation deduction under section
168(k) has been used of the same type as
the contributed property, the portion of the
contributed property's book basis that ex-
ceeds its adjusted tax basis must be recov-
ered under a reasonable method. See
§ 1.168(k)-2(b)(3)(iv)(B).

* * * * *

(f) * * * With the exception of para-
graphs (a)(1), (a)(8)(ii) and (iii), and
(a)(10) and (11) of this section, and of the
last sentence in paragraph (d)(2) of this
section, this section applies to properties
contributed to a partnership and to restate-
ments pursuant to § 1.704-1(b)(2)(iv)(f)
on or after December 21, 1993. * * * The
last sentence of paragraph (d)(2) of this
section applies to property contributed to
a partnership on or after the date of pub-
lication of a Treasury decision adopting
these rules as final regulations in the Fed-
eral Register. However, a taxpayer may
rely on the last sentence in paragraph
(d)(2) of this section in these proposed
regulations for property contributed to a
partnership on or after September 28,
2017, and ending before the date of pub-
lication of a Treasury decision adopting
these rules as final regulations in the Fed-
eral Register.

* * * * *

Par. 16. Section 1.743-1 is amended
by:

1\. Adding three sentences to the end of
paragraph (j)(4)(i)(B)(1) and adding two
sentences at the end of paragraph (l) to
read as follows:

§ 1.743-1 Optional adjustment to basis
of partnership property.

* * * * *

(j) ** *

(4) * * *

(i) * * *

(B) * * *

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(1) * * * Notwithstanding the above,
the partnership is allowed to deduct the
additional first year depreciation under
section 168(k) and § 1.168(k)-2 for an
increase in the basis of qualified prop-
erty, as defined in section 168(k) and
§ 1.168(k)-2, under section 743(b) in
a class of property, as defined in
§ 1.168(k)-2(e)(1)(ii)(A) through (F),
even if the partnership made the election
under section 168(k)(7) and § 1.168(k)-
2(e)(1) not to deduct the additional first
year depreciation for all other qualified
property of the partnership in the same class
of property, as defined in § 1.168(k)-
2(e)(1)(ii)(A) through (F), and placed in
service in the same taxable year, provided
the section 743(b) basis adjustment meets
all requirements of section 168(k) and
§ 1.168(k)-2. Further, the partnership may
make an election under section 168(k)(7)
and § 1.168(k)-2(e)(1) not to deduct the
additional first year depreciation for an
increase in the basis of qualified prop-
erty, as defined in section 168(k) and
§ 1.168(k)-2, under section 743(b) in
a class of property, as defined in
§ 1.168(k)-2(e)(1)(ii)(A) through (F),
and placed in service in the same taxable
year, even if the partnership does
not make that election for all other qual-
ified property of the partnership in the
same class of property, as defined in
§ 1.168(k)-2(e)(1)(ii)(A) through (F),
and placed in service in the same taxable
year. In this case, the section 743(b)
basis adjustment must be recovered un-
der a reasonable method.

(l) * * * The last three sentences of
paragraph (j)(4)(i)(B)(1) of this section
apply to transfers of partnership inter-
ests that occur on or after the date of
publication of a Treasury decision
adopting these rules as final regulations
in the Federal Register. However, a
partnership may rely on the last three
sentences in paragraph (j)(4)(i)(B)(1) of
this section in these proposed regula-
tions for transfers of partnership inter-
ests that occur on or after September 28,
2017, and ending before the date of pub-
lication of a Treasury decision adopting
these rules as final regulations in the
Federal Register.

Kirsten Wielobob
Deputy Commissioner for Services and
Enforcement.

(Filed by the Office of the Federal Register on August 2,
2018, 4:15 p.m., and published in the issue of the Federal
Register for August 8, 2018, 83 F.R. 39292)

## Notice of Proposed Rulemaking Proposed Removal of Section 385 Documentation Regulations

### REG-130244-17

AGENCY: Internal Revenue Service (IRS),
Treasury.

ACTION: Notice of proposed rulemaking.

SUMMARY: This document proposes re-
moving final regulations setting forth min-
imum documentation requirements that
ordinarily must be satisfied in order for
certain related-party interests in a corpo-
ration to be treated as indebtedness for
federal tax purposes (Documentation Reg-
ulations). This notice of proposed rulemak-
ing also proposes conforming amendments
to other final regulations to reflect the
proposed removal of the Documentation
Regulations. The final regulations to be
amended and removed generally affect cor-
porations that issue purported indebtedness
to related corporations or partnerships.

DATES: Written or electronic comments
and requests for a public hearing must be
received by December 24, 2018.

ADDRESSES: Send submissions to: CC:
PA:LPD:PR (REG-130244-17), room
5203, Internal Revenue Service, P.O. Box
7604, Ben Franklin Station, Washington,
DC 20044. Submissions may be hand-
delivered Monday through Friday between
the hours of 8 a.m. and 4 p.m. to CC:PA:
LPD:PR (REG-130244-17), Courier's
Desk, Internal Revenue Service, 1111 Consti-
tution Avenue NW, Washington, DC 20224
or sent electronically via the Federal eRule-
making Portal at http://www.regulations.gov
(IRS REG-130244-17).

FOR FURTHER INFORMATION
CONTACT: Concerning the proposed re-
moval and amendments, Austin Diamond-

Jones, (202) 317-6847; concerning sub-
missions of comments or requests for a
public hearing, Regina Johnson, (202)
317-6901 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

## Paperwork Reduction Act

In accordance with the Paperwork Re-
duction Act (44 U.S.C. chapter 35), the
information collection included in these
regulations under control number 1545-
2267 will be discontinued upon the adop-
tion of a final rule.

## Background

### Overview

Section 385 of the Internal Revenue
Code (Code) authorizes the Secretary of
the Treasury (Secretary) to prescribe rules
to determine whether an interest in a cor-
poration is treated for purposes of the
Code as stock or indebtedness (or as in
part stock and in part indebtedness) by
setting forth factors to be taken into ac-
count with respect to particular factual
situations.

On April 8, 2016, the Department of
the Treasury (Treasury Department) and
the IRS published proposed regulations
(REG-108060-15) under section 385 of
the Code (proposed regulations) in the
Federal Register (81 FR 20912 (April 8,
2016)) concerning the treatment of certain
interests in corporations as stock or in-
debtedness. A public hearing on the pro-
posed regulations was held on July 14,
2016. The Treasury Department and the
IRS also received numerous written com-
ments in response to the proposed regula-
tions, all of which are available at http://
www.regulations.gov.

On October 21, 2016, the Treasury De-
partment and the IRS published final and
temporary regulations under section 385.
TD 9790 (I.R.B. 2016-46, 81 FR 72858
(October 21, 2016)). The preamble to TD
9790 describes in detail the comments re-
ceived on the proposed regulations and
the thorough consideration given to each
comment. The preamble to TD 9790 also
explains the decisions reached by the
Treasury Department and the IRS and the
revisions that were made to the proposed
regulations.

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The final and temporary regulations
under section 385 are primarily comprised
of (i) the Documentation Regulations,
which establish minimum documentation
requirements that ordinarily must be sat-
isfied in order for purported debt obliga-
tions among related parties to be treated as
debt for federal tax purposes; and (ii) rules
that treat as stock certain debt that is is-
sued by a corporation to a controlling
shareholder in a distribution or in another
related-party transaction that achieves an
economically similar result (together, the
Section 385 Regulations).

Under the proposed regulations, the
Documentation Regulations would have
been applicable with respect to interests
issued or deemed issued on or after the
date the regulations were finalized. How-
ever, when finalized, the Documentation
Regulations were made applicable with
respect to interests issued or deemed is-
sued on or after January 1, 2018. See
§§ 1.385-1(f), 1.385-2(d)(2)(iii), and
1.385-2(i). This delayed applicability date
responded to taxpayer concerns of inade-
quate time to begin complying with the
Documentation Regulations once they
were finalized.

Executive Order 13789

Executive Order 13789, issued on
April 21, 2017 (E.O. 13789), instructs the
Secretary to review all significant tax reg-
ulations issued on or after January 1,
2016, and to take concrete action to alle-
viate the burdens of regulations that (i)
impose an undue financial burden on U.S.
taxpayers; (ii) add undue complexity to
the federal tax laws; or (iii) exceed the
statutory authority of the IRS.

E.O. 13789 further instructs the Secre-
tary to submit to the President within 60
days a report (First Report) that identifies
regulations that meet these criteria. Notice
2017-38 (2017-30 I.R.B. 147 (July 24,
2017)) included the Section 385 Regula-
tions in a list of eight regulations identi-
fied by the Secretary in the First Report as
meeting at least one of the first two crite-
ria specified in E.O. 13789. E.O. 13789
further instructs the Secretary to submit to
the President a second report (Second Re-
port) that recommends specific actions to
mitigate the burden imposed by regula-
tions identified in the First Report.

Notice 2017-36

As previously noted, the final Docu-
mentation Regulations were originally
promulgated to be applicable with respect
to interests issued or deemed issued on or
after January 1, 2018. However, in re-
sponse to continued taxpayer concern
with the application of the Documentation
Regulations, and in light of contemplated
further actions concerning the Section 385
Regulations in connection with the review
of those regulations under E.O. 13789, the
Treasury Department and the IRS deter-
mined that a further delay in the applica-
tion of the Documentation Regulations
would be appropriate. Accordingly, in
Notice 2017-36 (2017-33 I.R.B. 208
(August 14, 2017)), the Treasury Depart-
ment and the IRS announced the intent to
amend the Documentation Regulations to
delay the applicability of the regulations
for 12 months, making the regulations ap-
plicable only to interests issued or deemed
issued on or after January 1, 2019.

Comments Received in Connection with
E.O. 13789

In response to Notice 2017-38 and No-
tice 2017-36, the Treasury Department
and the IRS received approximately 40
comment letters submitted by professional
and trade associations, private businesses,
public interest groups, and trade unions,
as well as over 68,500 comments submit-
ted by individual taxpayers on http://
www.regulations.gov (website comments)
regarding the Section 385 Regulations.
The approximately 40 comment letters re-
flect a wide range of opinions, advocating
everything from strengthening to elimi-
nating the Documentation Regulations.
The individual taxpayer comments, how-
ever, uniformly urged that the Section 385
Regulations as a whole be retained or
strengthened.

### 1. Supporting retaining or strengthening the Documentation Regulations

At one end of the spectrum are com-
ment letters from various public interest
groups, trade unions, and other associa-
tions that, together, represent almost 500
organizations, comment letters from pri-
vate citizens, and the 68,502 website com-

ments. These comments strongly urged
that the Section 385 Regulations be re-
tained and enforced, if not strengthened.
These commenters would not be subject
to the Documentation Regulations. How-
ever, they are concerned with the possi-
bility of their withdrawal because they
view the Section 385 Regulations as an
important tool for maintaining the federal
income tax base so that small, domestic
businesses and working people and fami-
lies would not be forced to bear an unfair
and disproportionate portion of the cost of
U.S. society and infrastructure. Further,
these commenters view the Section 385
Regulations as an important step in level-
ing the playing field for small, domestic
businesses that cannot take advantage of
earnings stripping tax planning, thus al-
lowing such domestic businesses to com-
pete with large multinational companies
based solely on their products and ser-
vices, and not their ability to take advan-
tage of tax planning. In addition, these
commenters argued that allowing large
multinational corporations to shift earn-
ings offshore does not create jobs or eco-
nomic growth in the United States and
only serves to disadvantage domestic
companies.

### 2. Supporting limiting or withdrawing the Documentation Regulations

All of the remaining commenters
raised concerns about the complexity,
cost, and burden imposed by the Docu-
mentation Regulations. Most of these
commenters made various suggestions for
modifications that would reduce the scope
and burden of the Documentation Regu-
lations in ways they believed would make
the rules more reasonable. Few disputed
the Treasury Department's authority to
promulgate the Documentation Regula-
tions, however.

Among the commenters that made sug-
gestions for modifications to the Docu-
mentation Regulations, there was consid-
erable consensus on the modifications
being recommended. Most commenters
urged that transactions done in the ordi-
nary course of business, including trade
payables, be removed from the application
of the Documentation Regulations. Many
also urged that "market standards" be
broadly adopted as the test for determin-

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ing whether the documentation require-
ments are satisfied.

Another common concern raised by
these commenters was that the conse-
quences of failing to satisfy the Documen-
tation Regulations are too harsh, and com-
menters suggested expanding the rules to
make it easier to cure or avoid noncom-
pliance and to modify the consequences of
noncompliance to make these conse-
quences more proportionate to the con-
cerns addressed by the Documentation
Regulations. For example, commenters
noted that the time for curing defects in
documentation could be expanded, the
rules for establishing substantial compli-
ance or reasonable cause could be ex-
panded, and an exception could be added
to excuse transactions that pose no base-
erosion concern. In addition, there were
comments suggesting that the conse-
quences of failing to satisfy the regula-
tions could be limited to a denial of inter-
est deductions, which would avoid the
collateral effects of re-characterizing the
interest as equity.

Most of these commenters also re-
quested that the application of the Docu-
mentation Regulations be delayed so that
taxpayers would have adequate time to
comply with the Documentation Regula-
tions, taking into account any potential
additional modifications. Some suggested
delaying applicability for an additional
year or two, while others suggested delay-
ing applicability until a date that would
presumably allow the effects of any tax
reform legislation to be taken into ac-
count. But many urged that applicability
simply be delayed until the Treasury De-
partment and IRS have completed their
review, to avoid the expense of putting
systems in place that would not satisfy the
Documentation Regulations that are ulti-
mately applicable.

There were also various other modifi-
cations suggested. Some modifications
would apply to taxpayers generally, such
as excluding transactions between com-
monly held consolidated groups, remov-
ing the "reserved" sections, and replacing
the entire rule with an anti-abuse rule.
Other modifications were specific to the
industry of the commenter or its constitu-
ents, such as raising the threshold amounts
for certain businesses with higher gross
asset levels and exempting industries

that are perceived as less likely to en-
gage in abusive transactions or more
likely to engage in activities that further
public policy.

While a number of commenters sup-
ported the withdrawal of the Documenta-
tion Regulations, most of those comment-
ers were among those also offering
suggestions for modifications. However,
there were a few commenters that argued
only for withdrawal.

## Explanation of Provisions

On October 16, 2017, the Secretary
published the Second Report in the Fed-
eral Register (82 FR 48013 (October 16,
2017)) stating that the Treasury Depart-
ment and the IRS are considering revok-
ing the Documentation Regulations and
are actively considering developing and
proposing streamlined regulations. After
careful consideration of the comments re-
ceived on the Documentation Regulations
in connection with E.O. 13789, including
with respect to Notice 2017-36 and No-
tice 2017-38, this notice of proposed rule-
making proposes the removal of the Doc-
umentation Regulations.

The Treasury Department and the IRS
will continue to study the issues addressed
by the Documentation Regulations. When
that study is complete, the Treasury De-
partment and the IRS may propose a
modified version of the Documentation
Regulations. Any such regulations
would be substantially simplified and
streamlined to reduce the burden on
U.S. corporations and yet would still
require sufficient documentation and
other information for tax administration
purposes. Further, they would be pro-
posed with a prospective effective date
to allow sufficient lead-time for taxpay-
ers to design and implement systems to
comply with those regulations.

## Proposed Effective/ Applicability Date

The proposed removal of § 1.385-2
and conforming modifications are pro-
posed to be applicable as of the date of
publication in the Federal Register of a
Treasury decision adopting these pro-
posed regulations as final regulations.
However, taxpayers may rely on these
proposed regulations, in their entirety, un-
til the date a Treasury decision adopting

these regulations as final regulations is
published in the Federal Register.

## Statement of Availability of IRS Documents

IRS Revenue Procedures, Revenue
Rulings, Notices, and other guidance cited
in this document are published in the In-
ternal Revenue Bulletin (or Cumulative
Bulletin) and are available from the Su-
perintendent of Documents, U.S. Govern-
ment Publishing Office, Washington, DC
20402, or by visiting the IRS Web site at
http://www.irs.gov.

Special Analyses

### I. Regulatory Planning and Review

Executive Order 13777 directs agen-
cies to alleviate unnecessary regulatory
burdens placed on the American people
by managing the costs associated with the
governmental imposition of private ex-
penditures required to comply with fed-
eral regulations. Executive Orders 13771,
13563, and 12866 direct agencies to pru-
dently manage the cost of planned regu-
lations by assessing costs and benefits of
available regulatory alternatives and, if
regulation is necessary, to select regula-
tory approaches that maximize net ben-
efits (including potential economic, en-
vironmental, public health and safety
effects, distributive impacts, and eq-
uity). Executive Order 13563 empha-
sizes the importance of quantifying both
costs and benefits, of reducing costs, of
harmonizing rules, and of promoting
flexibility.

These proposed regulations have been
designated as subject to review under Ex-
ecutive Order 12866 pursuant to the
Memorandum of Agreement (April 11,
2018) (the "Treasury-OMB MOA") be-
tween the Treasury Department and the
Office of Management and Budget regard-
ing review of tax regulations. These pro-
posed regulations have been designated a
"significant regulatory action" by OIRA
under section 3(f) of Executive Order
12866 because they raise novel policy is-
sues. This proposed rule, when final, is
expected to be an Executive Order 13771
deregulatory action.

Pursuant to section 6(a)(3)(B) of Exec-
utive Order 12866, the following analysis

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discusses the anticipated economic effects
of these proposed regulations. Although not
required by that section, the Treasury De-
partment and the IRS have generally pro-
vided monetized estimates in this analysis.
These proposed regulations have been re-
viewed by the Office of Management and
Budget.

#### A. Affected population

This analysis uses an expansive defini-
tion of the estimated affected population
in order to minimize the risk that the anal-
ysis will not capture the effects on collat-
eral groups.

##### 1. Application to C Corporations

As discussed in TD 9790, this regula-
tory action affects approximately 6300
large C corporations out of 1.6 million C
corporations and 5.8 million corporations
of all types. This is because only C cor-
porations that are part of expanded affili-
ated groups in which one or more mem-
bers have sufficient assets ($100 million)
or revenue ($50 million), or are publicly
traded, would have been required to doc-
ument the relevant transactions.

##### 2. Documentation of Intercompany Loans and Compliance

While there is variation across busi-
nesses, longer-term intercompany debt
would typically be documented, in some
form of agreement containing terms and
rights, by corporations following good
business practices. However, some infor-
mation that would have been required by
the Documentation Regulations, such as a
debt capacity analysis, may not typically
be prepared in some cases. If applicable,
the Documentation Regulations would not
have required that a specific type of credit
analysis or documentation be prepared in
order to establish a related-party debtor's
creditworthiness and ability to repay, but
merely would have imposed a standard
intended to be closer to commercial prac-
tice. To the extent that information sup-
porting such analysis is already prepared
in accordance with a company's normal
business practice, removal of the Docu-
mentation Regulations would have a rela-
tively low compliance cost savings. How-

ever, where a business has not typically
prepared and maintained written debt in-
struments, term sheets, cash flow, or debt
capacity analyses for intercompany debt,
compliance cost savings related to the re-
moval of the Documentation Regulations
would have been higher. While the level
of documentation required is clearly evi-
dent in third-party lending, there is little
available information on the extent to
which related parties document their in-
tercompany loans. Anecdotal evidence
and comments received indicate that busi-
nesses vary in the extent to which related-
party indebtedness is documented.

### B. Description of the Documentation Regulations

#### 1. In General

If applicable, the Documentation Reg-
ulations would have prescribed the nature
of the documentation necessary to sub-
stantiate the federal income tax treatment
of related-party interests as indebtedness,
including documentation of factors analo-
gous to those found in third-party loans.
This generally means that taxpayers
would have had to be able to provide such
things as: evidence of an unconditional
and binding obligation to make interest
and principal payments on certain fixed
dates; that the holder of the loan has the
rights of a creditor, including superior
rights to shareholders in the case of dis-
solution; a reasonable expectation of the
borrower's ability to repay the loan; and
evidence of conduct consistent with a
debtor-creditor relationship. The Docu-
mentation Regulations would have ap-
plied to relevant intercompany debt issued
by U.S. borrowers beginning in 2019 and
would have required that the taxpayer's
documentation for a given tax year be
prepared by the time the borrower's fed-
eral income tax return is filed.

The Documentation Regulations would
have applied only to related groups of cor-
porations in which the stock of at least one
member is publicly traded or the group's
financial results report assets exceeding
$100 million or annual revenue exceeding
$50 million. Because there is no general
definition of a small business under the
Code, these asset and revenue limits were
designed to exceed the maximum receipts

threshold used by the Small Business Ad-
ministration in defining small businesses
(U.S. Small Business Administration, Table
of Small Business Size Standards, 2016). In
addition, these thresholds exclude about 99
percent of C corporation taxpayers while
retaining 85 percent of economic activity as
measured by total income. Approximately
1.5 million out of 1.6 million C corporation
tax filers are single entities and therefore
have no affiliates with which to engage in
tax arbitrage. The intent was to limit the
Documentation Regulations to large busi-
nesses with highly-related affiliates, which
are responsible for most corporate activity.
For example, large foreign-controlled do-
mestic C corporations (FCDCs) (those hav-
ing assets over $100 million or total income
over $50 million) make up 3 percent of
FCDCs but report 90 percent of FCDC in-
terest deductions and 93 percent of FCDC
total income. Similarly, the Documentation
Regulations would have exempted most or-
dinary course transactions.

### C. Assessment of the Documentation Regulations' effects

The Treasury Department and the IRS
estimate that 6,300 or 0.4 percent of C
corporation taxpayers would have been
affected by the Documentation Regula-
tions, mainly because 95 percent of tax-
payers do not have affiliated corporations,
and the regulations would have affected
only transactions between affiliates.

While only a small fraction of corpo-
rate taxpayers will be affected by the re-
moval of the Documentation Regulations,
these 6,300 taxpayers tend to be the larg-
est C corporation tax filers, claiming
65 percent of total interest deductions
claimed by C corporations, 53 percent of
total income claimed by C corporations,
81 percent of total income subject to tax
claimed by C corporations, and 75 percent
of total income tax after credits claimed
by C corporations. Of these C corpora-
tions, approximately one-third are FCDCs
that report about 20 percent of the affected
total income and 20 percent of the af-
fected interest deductions.

#### 1. Monetized Estimates

The revenue and compliance burden
effects are measured against a no-action

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baseline, which captures tax-related be-
havior in the absence of the proposed reg-
ulatory action and includes taxpayer behav-
ior the Treasury Department and the IRS
expect as a result of the enactment of P.L.
115-97 (TCJA). While this particular
regulation does not implement TCJA re-
quirements, it interacts with the TCJA.
There are several provisions of the
TCJA that reduced the tax advantages of
Foreign Controlled Domestic Corpora-
tions (FCDCs) over domestically con-
trolled companies (DCCs) and thus may
affect the tax revenue and compliance
burden consequences of the removal of
the Documentation Regulations. First,
for taxable years beginning after De-
cember 31, 2017, the TCJA reduced the
statutory corporate tax rate from 35 per-
cent to 21 percent, which lowers the
effective tax rate for DCCs more than
for FCDCs. Second, the ability of
FCDCs to strip earnings out of the
United States using deductions for inter-
est expense was significantly reduced by
the TCJA through amendments to sec-
tion 163(j) of the Code. Specifically, the
section 163(j) statutory amendments (1)
eliminated the debt-equity ratio safe
harbor, (2) reduced the maximum net
interest deductions' share of adjusted
taxable income from 50 percent to 30
percent, (3) limited all, rather than just
related-party, interest deductions, and (4)
eliminated the carryforward of excess limi-
tation under pre-TCJA section 163(j). The
TCJA's Base Erosion Anti-abuse Tax
(BEAT) further reduces this ability. Thus,
the benefits of the Documentation Regula-
tions in reducing foreign acquisitions of

U.S. assets and interest stripping were re-
duced by the TCJA.

The vast majority of TCJA provisions
are self-executing, which means that they
are binding on taxpayers and the IRS
without any regulatory action and there-
fore their applicability and potential tax-
payers' responses to such applicability are
assumed in the baseline. The Treasury
Department and the IRS recognize, how-
ever, that the section 163(j) amendments
and the BEAT, along with other TCJA
provisions, while self-executing, provide
interpretive latitude for taxpayers and the
IRS and that, without further implementa-
tion guidance, those provisions could
prompt a variety of potential taxpayer re-
sponses. Faced with ambiguous tax provi-
sions that are susceptible to a range of
reasonable interpretations, some taxpay-
ers will take conservative filing positions,
others will take aggressive filing positions,
and still others will simply forego business
activity that implicates any uncertain provi-
sions. Accordingly, the Treasury Depart-
ment and the IRS have included in the base-
line their best assessment of taxpayer
behavior under current law and regulatory
guidance; the baseline does not assume reg-
ulatory guidance that has not yet been is-
sued. To the extent that taxpayer responses
to any future legislation or rules regarding
section 163(j) or the BEAT differ from this
assessment, the revenue and compliance
burden estimates with respect to the pro-
posed removal of the Documentation Reg-
ulations would also be affected.

The Treasury Department and the IRS
solicit comments on the revenue and com-
pliance burden estimates with respect to

the proposed removal of the Documenta-
tion Regulations.

##### a. Revenue effects of proposed regulations

The Treasury Department and the IRS
previously addressed revenue effects in
the original regulatory impact analysis
(RIA) published in the preamble to T.D.
9790 and have received comments that
address the revenue effect of the Docu-
mentation Regulations. The removal of
the Documentation Regulations may
slightly increase the ability of some firms
to strip earnings out of the United States
and so reduce their tax payments. The
Treasury Department and the IRS esti-
mate that removal of the Documentation
Regulations will reduce revenue by $407
million over the period 2019-2028, using
standard revenue reporting conventions
(undiscounted nominal total). The net
present value of the revenue loss is $302
and $243 ($2018 millions) using real dis-
count rates of 3 and 7 percent, respec-
tively. The annualized amounts are $35.4
and $34.5 ($2018 millions), again based
on 3 percent and 7 percent real rates re-
spectively. The revenue effects were esti-
mated using the methodology described in
the original RIA published in the preamble
to T.D. 9790, although the estimate now
covers 2019 to 2028 and includes factors
that have changed as a result of TCJA as
well as other technical adjustments.

Annualized discounted revenue effects
are shown in the following table.

Estimated change in annual tax revenue (annualized value, $2018 millions)

Fiscal Years 2019 to 2028 (3% real discount rate)

Fiscal Years 2019 to 2028 (7% real discount rate )

-$35.4

-$34.5

b. Compliance burden effects from
proposed regulations

The Treasury Department and the IRS
estimate that removal of the Documenta-
tion Regulations will reduce compliance
costs by $924 million over the period
2019-2028 (undiscounted nominal total).
The net present value of the compliance
cost savings is $773 and $685 ($2018
millions) using real discount rates of 3 and

7 percent respectively. These amounts are
$90.6 million and $97.5 million on an
annualized basis, again based on 3 percent
and 7 percent real rates respectively. The
methodology for estimating the compli-
ance cost savings also followed the meth-
odology described in the original RIA
published in the preamble to T.D. 9790,
with analogous adjustments due to the
change in the period covered, the effects
of TCJA, and other technical adjustments.

The Treasury Department and the IRS
view the proposed action (removal of
§ 1.385-2) as reducing both tax revenues
and compliance costs but they view the
TCJA as primarily affecting the reduction
in tax revenue from the action due mainly
to reduced allowable interest deductions
(163(j)) and to a lesser extent, taxation of
certain base eroding payments to related
parties (BEAT), including interest. The
Treasury Department and the IRS do not

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expect a significant reduction in the num-
ber of relevant related party transactions,
only a reduction in the dollar amounts,
and therefore see a smaller effect of the
TCJA on compliance cost savings than on

revenue losses, relative to previous esti-
mates.

In addition, the analysis includes a sen-
sitivity analysis in which the compliance
costs were estimated for a 90 percent in-

terval around the central estimate. Annu-
alized discounted ongoing and start-up
changes in compliance costs ($2018 mil-
lions) are shown in the following table.

Estimated change in annual compliance costs (annualized value, $2018 millions)

Fiscal Years 2019 to 2028 (3% real discount rate)

Fiscal Years 2019 to 2028 (7% real discount rate)

Central estimate

-$90.6

-$97.5

High estimate

-$113.3

-$121.9

Low estimate

-$68.0

-$73.1

Technical note: In this rulemaking, the Treasury Department made technical adjustments relative to the 2016 rulemaking in cal-
culating the annualized compliance cost estimates. The cost stream in this rulemaking is in 2018 dollars, reflects a two-year de-
lay in effective date (relative to the previous estimates), and applies real discount rates of 3 and 7 percent. Technical adjust-
ments account for part of the difference in the estimates between the rulemakings.

2\. Non-Monetized Effects

##### a. Reduced Tax Compliance

By slightly increasing the ability of
some taxpayers to strip earnings out of the
United States through transactions with no
meaningful economic or non-tax benefit,
and so reducing their tax payments, re-
moval of the Documentation Regulations
is likely to slightly reduce the overall per-
ceived legitimacy of the U.S. tax system,
and hence reduce voluntary compliance.

##### b. Efficiency and growth effects

By changing the treatment of certain
transactions and activities, removal of the
Documentation Regulations potentially
affects economic efficiency and growth
(output). While the removal of the Docu-
mentation Regulations may have multiple
and to some extent offsetting effects, on
net they are likely to slightly reduce eco-
nomic efficiency. For example, the re-
moval of the Documentation Regulations
will likely increase the tax advantage for-
eign owners have over domestic owners
of U.S. assets, and consequently will in-
crease the propensity for foreign acquisi-
tions and ownership of U.S. assets that are
motivated by tax considerations rather
than economic substance. While these ef-
fects will likely be small, they likely re-
duce efficiency and growth. By increasing
the ability to undertake tax-motivated ac-
quisitions or ownership structures, re-
moval of the Documentation Regulations
may slightly reduce the incentive for as-
sets to be owned or managed by those
most capable of putting the assets to their

highest-valued use. Moreover, removal of
the Documentation Regulations may put
purely domestic U.S. firms on less even
tax footing than their foreign-owned com-
petitors operating in the United States. On
the other hand, removal of the Documen-
tation Regulations may slightly reduce the
effective tax rate and compliance costs on
U.S. inbound investment. While the
magnitude of this reduction is small, to
the extent that it increases new capital
investment in the United States, its ef-
fects would be efficiency and growth
enhancing. Most inbound investment is
via acquisition of existing U.S. compa-
nies rather than greenfield (new) invest-
ment in the United States, however, and
thus such investment changes the own-
ership of existing assets, without neces-
sarily adding to the stock of capital em-
ployed in the United States. On balance,
the likely effect of the removal of the
Documentation Regulations is to reduce
the efficiency of the corporate tax sys-
tem slightly.

##### c. Higher Tax Administrative Costs for the IRS

The reduced loan documentation re-
quired of large corporations as a result of
the removal of the Documentation Regu-
lations will reduce the ability of the IRS to
more effectively administer the tax laws
by making it harder for the IRS to evalu-
ate whether purported debt transactions
are legitimate loans. This will raise the
cost of auditing and evaluating the tax
returns of companies engaged in these
transactions.

##### II. Regulatory Flexibility Act

Pursuant to the Regulatory Flexibility
Act (5 U.S.C. Chapter 6), it is hereby
certified that the proposed regulations will
not have a significant economic impact on
a substantial number of small entities.

As discussed earlier in this preamble,
on October 21, 2016, the Treasury Depart-
ment and the IRS published final and tem-
porary regulations under section 385. The
final and temporary regulations under sec-
tion 385, among other things, established
minimum documentation requirements
that must be satisfied in order for pur-
ported debt obligations among related par-
ties to be treated as debt for federal tax
purposes. When finalized in October
2016, the Documentation Regulations
were made applicable with respect to in-
terests issued or deemed issued on or after
January 1, 2018. In response to continued
taxpayer concern with the application of
the Documentation Regulations, the Trea-
sury Department and the IRS, in Notice
2017-36, further delayed the applicability
of the regulations by making the regula-
tions applicable only to interests issued or
deemed issued on or after January 1,
2019. This proposed rule, if finalized,
would remove these Documentation Reg-
ulations that have not yet been made ap-
plicable to any interests issued by any
taxpayer.

Section 1.385-2, if applicable, would
have provided documentation require-
ments to substantiate the treatment of cer-
tain related party instruments as indebted-
ness. Section 1.385-2 would have applied
to large corporate groups (specifically,
those that are publically traded, or have

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assets exceeding $100 million or annual
total revenue exceeding $50 million in its
expanded group), thus limiting the scope
of small entities affected. Section 1.385-2
would have applied to financial institu-
tions, which are considered small entities
under the Regulatory Flexibility Act if
they have less than $550 million in assets
(13 CFR 121). The Treasury Department
and the IRS believe that § 1.385-2 would
not affect a substantial number of small
entities other than small financial institu-
tions. Even if the regulations affected a
substantial number of small entities in that
sector, the economic impact of this rule
would be minimal because the proposed
regulations would remove the currently
inapplicable documentation requirements
in § 1.385-2. Accordingly, a regulatory
flexibility analysis is not required.

Pursuant to section 7805(f), this notice
of proposed rulemaking has been submit-
ted to the Chief Counsel for Advocacy of
the Small Business Administration for
comment on its impact on small business.

###### Unfunded Mandates Reform Act

Section 202 of the Unfunded Man-
dates Reform Act of 1995 (UMRA) re-
quires 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 2018, that
threshold is approximately $150 mil-
lion. This proposed rule does not in-
clude any mandate that may result in
expenditures by state, local, or tribal
governments, or by the private sector in
excess of that threshold.

###### Executive Order 13132: Federalism

Executive Order 13132 (entitled “Fed-
eralism") prohibits an agency from publish-
ing any rule that has federalism implications
if the rule either imposes substantial, direct
compliance costs on state and local govern-
ments, 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. This

proposed rule does not have federalism im-
plications and does not impose substantial
direct compliance costs on state and local
governments or preempt state law within the
meaning of the Executive Order.

## Comments and Requests for Public Hearing

Before these proposed regulations are
adopted as final regulations, consideration
will be given to any comments that are
submitted timely to the IRS as prescribed
in this preamble under the ADDRESSES
heading. All comments will be available
at http://www.regulations.gov or upon re-
quest. A public hearing will be scheduled
if requested in writing by any person that
timely submits written comments. If a
public hearing is scheduled, notice of the
date, time, and place of the public hearing
will be published in the Federal Register.

## Drafting Information

The principal author of this notice of
proposed rulemaking is Austin Diamond-
Jones of the Office of the Associate Chief
Counsel (Corporate). However, other per-
sonnel from the Treasury Department and
the IRS participated in its development.

## List of Subjects in 26 CFR Part 1

Income taxes, Reporting and record-
keeping requirements.

## Proposed Amendments to the Regulations

Accordingly, 26 CFR part 1 is pro-
posed to be amended as follows:

## PART 1-INCOME TAXES

Paragraph 1. The authority citation for
part 1 is amended by removing the sec-
tional authority for § 1.385-2 to read, in
part, as follows:

Authority: 26 U.S.C. 7805

* * * * *

Par. 2. Section 1.385-1 is amended by
revising paragraph (a), the last sentence of
paragraphs (c) introductory text and (c)(4)
(iv), paragraph (d)(1)(i), the first sentence of
paragraph (d)(1)(ii), and paragraphs (d)(1)
(iii) and (d)(1)(iv)(A), and removing and
reserving paragraph (d)(2)(i).

The revisions read as follows:

§ 1.385-1 General provisions.

(a) Overview of section 385 regulations.
This section and §§ 1.385-3 through
1.385-4T (collectively, the section 385 reg-
ulations) provide rules under section 385 to
determine the treatment of an interest in a
corporation as stock or indebtedness (or as
in part stock and in part indebtedness) in
particular factual situations. Paragraph (b)
of this section provides the general rule for
determining the treatment of an interest
based on provisions of the Internal Revenue
Code and on common law, including the
factors prescribed under common law. Para-
graphs (c), (d), and (e) of this section pro-
vide definitions and rules of general appli-
cation for purposes of the section 385
regulations. Section 1.385-3 sets forth addi-
tional factors that, when present, control the
determination of whether an interest in a
corporation that is held by a member of the
corporation's expanded group is treated (in
whole or in part) as stock or indebtedness. *
** * *

(c) * * * For additional definitions that
apply for purposes of their respective sec-
tions, see §§ 1.385-3(g) and 1.385-4T(e).
* * * * *

(4) * * *

(iv) * * * For purposes of the section
385 regulations, a corporation is a mem-
ber of an expanded group if it is described
in this paragraph (c)(4)(iv) of this section
immediately before the relevant time for
determining membership (for example,
immediately before the issuance of a debt
instrument (as defined in § 1.385-3(g)(4))
or immediately before a distribution or ac-
quisition that may be subject to § 1.385-
3(b)(2) or (3)).

* * * * *

(d) * * *

(1) * * *

(i) In general. If a debt instrument (as
defined in § 1.385-3(g)(4)) is deemed to
be exchanged under the section 385 reg-
ulations, in whole or in part, for stock, the
holder is treated for all federal tax pur-
poses as having realized an amount equal
to the holder's adjusted basis in that por-
tion of the debt instrument as of the date
of the deemed exchange (and as having
basis in the stock deemed to be received
equal to that amount), and, except as pro-
vided in paragraph (d)(1)(iv)(B) of this
section, the issuer is treated for all federal

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tax purposes as having retired that portion
of the debt instrument for an amount equal
to its adjusted issue price as of the date of
the deemed exchange. In addition, neither
party accounts for any accrued but unpaid
qualified stated interest on the debt instru-
ment or any foreign exchange gain or loss
with respect to that accrued but unpaid qual-
ified stated interest (if any) as of the deemed
exchange. This paragraph (d)(1)(i) does not
affect the rules that otherwise apply to the
debt instrument prior to the date of the
deemed exchange (for example, this para-
graph (d)(1)(i) does not affect the issuer's
deduction of accrued but unpaid qualified
stated interest otherwise deductible prior to
the date of the deemed exchange). More-
over, the stock issued in the deemed ex-
change is not treated as a payment of ac-
crued but unpaid original issue discount or
qualified stated interest on the debt instru-
ment for federal tax purposes.

(ii) Section 988. Notwithstanding the
first sentence of paragraph (d)(1)(i) of this
section, the rules of § 1.988-2(b)(13) ap-
ply to require the holder and the issuer of
a debt instrument that is deemed to be
exchanged under the section 385 regula-
tions, in whole or in part, for stock to
recognize any exchange gain or loss, other
than any exchange gain or loss with re-
spect to accrued but unpaid qualified
stated interest that is not taken into ac-

count under paragraph (d)(1)(i) of this
section at the time of the deemed ex-
change. * * *

(iii) Section 108(e)(8). For purposes of
section 108(e)(8), if the issuer of a debt
instrument is treated as having retired all
or a portion of the debt instrument in
exchange for stock under paragraph
(d)(1)(i) of this section, the stock is treated
as having a fair market value equal to
the adjusted issue price of that portion of
the debt instrument as of the date of the
deemed exchange.

(iv) * * *

(A) A debt instrument that is issued by
a disregarded entity is deemed to be ex-
changed for stock of the regarded owner
under § 1.385-3T(d)(4); * * *

* * * * *

§ 1.385-2 [Removed]

Par. 3. Section 1.385-2 is removed.

Par. 4. Section 1.385-3 is amended by
revising paragraph (g)(4) to read as fol-
lows:

§ 1.385-3 Transaction in which debt
proceeds are distributed or that have a
similar effect.

* * * * *

(g) * * *

(4) Debt instrument. The term debt in-
strument means an interest that would, but
for the application of this section, be
treated as a debt instrument as defined in
section 1275(a) and § 1.1275-1(d).

* * * * *

Par. 5. Section 1.1275-1 is amended by
revising the last sentence of paragraph (d)
to read as follows:

§ 1.1275-1 Definitions.

** * * *

(d) * * * See § 1.385-3 for rules that
treat certain instruments that otherwise
would be treated as indebtedness as stock
for federal tax purposes.
* * * * *

Kirsten Wielobob
Deputy Commissioner for Services and
Enforcement.

(Filed by the Office of the Federal Register on September
21, 2018, 8:45 a.m. and published in the issue of the Federal
Register for September 24, 2018, 83 F.R. 48265)

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## Definition of Terms

Revenue rulings and revenue procedures
(hereinafter referred to as "rulings") that
have an effect on previous rulings use the
following defined terms to describe the
effect:

Amplified describes a situation where
no change is being made in a prior pub-
lished position, but the prior position is
being extended to apply to a variation of
the fact situation set forth therein. Thus, if
an earlier ruling held that a principle ap-
plied to A, and the new ruling holds that
the same principle also applies to B, the
earlier ruling is amplified. (Compare with
modified, below).

Clarified is used in those instances
where the language in a prior ruling is
being made clear because the language
has caused, or may cause, some confu-
sion. It is not used where a position in a
prior ruling is being changed.

Distinguished describes a situation
where a ruling mentions a previously pub-
lished ruling and points out an essential
difference between them.

Modified is used where the substance
of a previously published position is being
changed. Thus, if a prior ruling held that a
principle applied to A but not to B, and the
new ruling holds that it applies to both A

and B, the prior ruling is modified because
it corrects a published position. (Compare
with amplified and clarified, above).

Obsoleted describes a previously pub-
lished ruling that is not considered deter-
minative with respect to future transac-
tions. This term is most commonly used in
a ruling that lists previously published rul-
ings that are obsoleted because of changes
in laws or regulations. A ruling may also
be obsoleted because the substance has
been included in regulations subsequently
adopted.

Revoked describes situations where the
position in the previously published ruling
is not correct and the correct position is
being stated in a new ruling.

Superseded describes a situation where
the new ruling does nothing more than
restate the substance and situation of a
previously published ruling (or rulings).
Thus, the term is used to republish under
the 1986 Code and regulations the same
position published under the 1939 Code
and regulations. The term is also used
when it is desired to republish in a single
ruling a series of situations, names, etc.,
that were previously published over a pe-
riod of time in separate rulings. If the new
ruling does more than restate the sub-

stance of a prior ruling, a combination of
terms is used. For example, modified and
superseded describes a situation where the
substance of a previously published ruling
is being changed in part and is continued
without change in part and it is desired to
restate the valid portion of the previously
published ruling in a new ruling that is
self contained. In this case, the previously
published ruling is first modified and then,
as modified, is superseded.

Supplemented is used in situations in
which a list, such as a list of the names of
countries, is published in a ruling and that
list is expanded by adding further names
in subsequent rulings. After the original
ruling has been supplemented several
times, a new ruling may be published that
includes the list in the original ruling and
the additions, and supersedes all prior rul-
ings in the series.

Suspended is used in rare situations to
show that the previous published rulings
will not be applied pending some future
action such as the issuance of new or
amended regulations, the outcome of
cases in litigation, or the outcome of a
Service study.

## Abbreviations

The following abbreviations in current
use and formerly used will appear in ma-
terial published in the Bulletin.

A-Individual.

Acq .- Acquiescence.

B-Individual.

BE-Beneficiary.

F.R .- Federal Register.

FUTA-Federal Unemployment Tax Act.

FX-Foreign corporation.

G.C.M .- Chief Counsel's Memorandum.

GE-Grantee.

GP-General Partner.

TFR-Transferor.

CI-City.

GR-Grantor.

T.I.R .- Technical Information Release.

TP-Taxpayer.

Ct.D .- Court Decision.

I.R.B .- Internal Revenue Bulletin.

TR-Trust.

CY-County.

LE-Lessee.

TT-Trustee.

D-Decedent.

LP-Limited Partner.

U.S.C .- United States Code.

DC-Dummy Corporation.

LR-Lessor.

X-Corporation.

DE-Donee.

Del. Order-Delegation Order.

Nonacq .- Nonacquiescence.

O Organization.

DR-Donor.

P-Parent Corporation.

PHC-Personal Holding Company.

PO-Possession of the U.S.

PR-Partner.

PRS-Partnership.

PTE-Prohibited Transaction Exemption.
Pub. L .- Public Law.

REIT-Real Estate Investment Trust.

Rev. Proc .- Revenue Procedure.

Rev. Rul .- Revenue Ruling.

S-Subsidiary.

S.P.R .- Statement of Procedural Rules.

Stat .- Statutes at Large.

BK-Bank.

B.T.A .- Board of Tax Appeals.

T.C .- Tax Court.

C-Individual.

T.D .- Treasury Decision.

C.B .- Cumulative Bulletin.

TFE-Transferee.

CFR-Code of Federal Regulations.

COOP-Cooperative.

IC-Insurance Company.

M-Minor.

Y-Corporation.

Z-Corporation.

DISC-Domestic International Sales Corporation.

E-Estate.

EE-Employee.

E.O .- Executive Order.

ER-Employer.

ERISA-Employee Retirement Income Security Act.
EX-Executor.

F-Fiduciary.

FC-Foreign Country.

FICA-Federal Insurance Contributions Act.

FISC-Foreign International Sales Company.

FPH-Foreign Personal Holding Company.

T-Target Corporation.

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### Numerical Finding List1

Bulletin 2018-27 through 2018-41

#### Announcements:

2018-09, 2018-28 I.R.B. 206
2018-12, 2018-30 I.R.B. 232

#### Notices:

2018-48, 2018-28 I.R.B. 9
2018-56, 2018-27 I.R.B. 3
2018-58, 2018-33 I.R.B. 305
2018-59, 2018-28 I.R.B. 196
2018-60, 2018-31 I.R.B. 275
2018-61, 2018-31 I.R.B. 278
2018-62, 2018-34 I.R.B. 316
2018-63, 2018-34 I.R.B. 318
2018-64, 2018-35 I.R.B. 347
2018-65, 2018-35 I.R.B. 350
2018-67, 2018-36 I.R.B. 409
2018-68, 2018-36 I.R.B. 418
2018-69, 2018-37 I.R.B. 426
2018-70, 2018-38 I.R.B. 441
2018-71, 2018-41 I.R.B. 548
2018-72, 2018-40 I.R.B. 522
2018-73, 2018-40 I.R.B. 526
2018-74, 2018-40 I.R.B. 529
2018-75, 2018-41 I.R.B. 556

#### Proposed Regulations:

REG-130244-17, 2018-41 I.R.B. 591
REG-103474-18, 2018-32 I.R.B. 284
REG-104397-18, 2018-41 I.R.B. 558
REG-106977-18, 2018-27 I.R.B. 6

REG-107892-18, 2018-35 I.R.B. 353
REG-112176-18, 2018-37 I.R.B. 430

#### Revenue Procedures:

2018-35, 2018-28 I.R.B. 204

2018-36, 2018-38 I.R.B. 442

2018-37, 2018-29

I.R.B. 210

2018-38, 2018-31

I.R.B. 280

2018-39, 2018-34

I.R.B. 319

2018-40, 2018-34

I.R.B. 320

2018-42, 2018-36

I.R.B. 424

2018-43, 2018-36

I.R.B. 425

2018-44, 2018-37

I.R.B. 426

2018-45, 2018-37

I.R.B. 428

2018-46, 2018-39

I.R.B. 460

2018-47, 2018-39

I.R.B. 518

2018-48, 2018-40

I.R.B. 521

Revenue Procedures :- Continued

2018-49, 2018-41 I.R.B. 548

### Revenue Rulings:

2018-19, 2018-27 I.R.B. 1

2018-20, 2018-28 I.R.B. 8
2018-21, 2018-32 I.R.B. 282
2018-22, 2018-34 I.R.B. 308
2018-23, 2018-36 I.R.B. 405

2018-24, 2018-36 I.R.B. 407
2018-25, 2018-39 I.R.B. 445
2018-26, 2018-40 I.R.B. 520

2018-27, 2018-41 I.R.B. 546

### Treasury Decisions:

9834, 2018-31 I.R.B. 233
9835, 2018-33 I.R.B. 288
9836, 2018-33 I.R.B. 291
9838, 2018-34 I.R.B. 309
9839, 2018-35 I.R.B. 325

1 A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2018-01 through 2018-26 is in Internal Revenue Bulletin
2018-26, dated June 27, 2018.

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### Finding List of Current Actions on Previously Published Items1

Bulletin 2018-27 through 2018-41

Notices:

2014-5
Modified by
Notice 2018-69, 2018-37 I.R.B. 426

2015-28
Modified by
Notice 2018-69, 2018-37 I.R.B. 426

2016-57
Modified by
Notice 2018-69, 2018-37 I.R.B. 426

2017-45
Modified by
Notice 2018-69, 2018-37 I.R.B. 426

#### Revenue Procedures:

2015-27
Amplified by
Rev. Proc. 2018-39, 2018-34 I.R.B. 319

2017-24
Amplified by
Rev. Proc. 2018-39, 2018-34 I.R.B. 319

2018-31
Modified by
Rev. Proc. 2018-44, 2018-37 I.R.B. 426

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# Internal Revenue Service Washington, DC 20224

Official Business
Penalty for Private Use, $300

# INTERNAL REVENUE BULLETIN

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# We Welcome Comments About the Internal Revenue Bulletin

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