MoldMaking Technology

OCT 2018

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36 MoldMaking Technology —— OCTOBER 2018 THE BOTTOM New Rules on Bonus Depreciation By Michael J. Devereux II, CPA, CMP The Tax Cuts and Jobs Act (the Act) allows mold shops to claim -percent bonus depreciation for eligible property that they place in service after September ••, •• through December , •••. The claim amount phases out • percent for each of the following €ive years. This past August, the U.S. Treasury issued a notice of proposed rulemaking related to bonus depreciation (or €irst-year depreciation deductions). Mold shops are allowed a depreciation deduction for the exhaustion, wear and tear and obsolescence of property that they have used in the business. For tan- gible property, the allowable deprecia- tion deduction is determined under the Modi€ied Accelerated Cost Recovery System (MACRS). Before the Act, quali€ied property was de€ined as new property. Moldmakers were allowed an additional bonus depreciation (or €irst-year depreciation deduction) equal to ‰ percent of the adjusted basis in the property. Proposed Regulations Tax reform made the following changes to the bonus depre- ciation rules: a new, -percent bonus depreciation percent- age; an expanded de€inition of eligible property to include used, depreciable property; and an extended, placed-in- service phase-out date from before January , ••, to before January , ••• (which extends the ability of mold shops to claim bonus depreciation by seven years). The new U.S. Treasury regulations identify the following requirements for property to qualify for bonus depreciation: The depreciable property must be a MACRS property that has a recovery period of years or less, some purchased software or qualiied improvement property that shops place in service after September •, •• and before January •, ••. For moldmak- ers, this includes most machinery, equipment and tooling that they do not use in the conduct of research (which would be deductible as the expenditures are paid or incurred). Also, the purchased software would qualify (as long as shops do not purchase it as part of the purchase of a trade or business). Quali€ied improvement property includes improvements to the shop that do no expand its footprint. The original use of the property must commence with the shop, or used equipment must meet speciic requirements. The original use of the eligible property must commence with the company, or the shop must not purchase the used equipment from a related party. Tax reform broadened the de€inition of property eligible for bonus depreciation to include used property. This will impact mergers and acquisitions, as many middle-market transactions are structured as asset sales. That is, if a mold shop purchases all of the assets of another shop, it can claim -percent bonus depreciation on the purchase price that is allocated to otherwise eligible assets. Eligible property must be placed in service by the shop within a speciied period. A shop must place the asset in service after September ••, •• and before December , ••• to qualify for bonus depreciation. An asset is considered in service once it is ready, available and capable of performing its intended function. Documenting when a shop places an asset in service is more important than ever, especially if the asset has the potential to qualify for -percent bonus depreciation. Historically, the IRS has pushed for latter placed-in-service dates to slow depreciation deductions. However, if a shop places an asset in service around September ••, ••, the IRS may want proof that it meets the requirements for the -percent bonus depreciation. The depreciable property must be acquired after September •, •• or acquired by the shop under a written, binding contract entered into by the shop after September •, ••. The regula- tions also clarify that assets that are custom-manufactured, constructed or produced for a shop are subject to the written, binding contract rules. For example, if the contract states the date that the parties entered into the contract, the closing date and the delivery date, then the date that the parties entered into the contract is the date that the shop acquired the property. For self-constructed assets (that do not qualify as research expenditures), the acquisition date is the date that the shop begins manufacturing, constructing or producing the property.

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