Looking at buying a partnership/LLC interest? 100% bonus depreciation could be available

December 12, 2018|Shane Wheeler

The IRS recently released proposed regulations surrounding Section 168(k), as amended under the Tax Cuts and Jobs Act (TCJA), detailing the new 100% bonus depreciation available on eligible property in the year placed in service, through 2022.

Additionally, the TCJA removed the requirement that the property for which bonus depreciation is being claimed be “new,” paving the way for the full expensing of qualifying used assets.

Not surprisingly, this led to some confusion regarding whether basis adjustments arising from the sale, exchange or redemption of partnership/LLC interests (for brevity, we will refer to the assets created from these basis adjustments as “step-up assets”) would now be eligible for the 100% deduction. Luckily, the proposed regulations mentioned above have addressed this issue and, in doing so, have created an interesting new tax planning consideration.

When can you take bonus depreciation on step-up assets?

The answer lies in the structure of the transaction. The proposed regulations indubitably lead us to another section of the code, stating that only those step-up assets resulting from a cross-purchase of a partnership/LLC interest may be eligible for bonus depreciation (there are additional requirements to this general rule as you will see below.) The proposed regulations specifically exclude step-up assets from the redemption of a partnership/LLC interest and the death of a partner/LLC member from eligibility for bonus depreciation.

Additional requirements

For a step-up asset created as the result of a cross-purchase to be eligible for bonus depreciation, the underlying asset must also be eligible for bonus depreciation. Stated differently, the step-up assets resulting from the cross-purchase will be allocated among the underlying assets of the partnership/LLC. The step-up assets allocated to those underlying assets that are bonus eligible (have a MACRS asset life of 20 years or less) will also be eligible for bonus depreciation.

The regulations further provide that to be eligible for bonus depreciation, step-up assets must not be acquired from a related person, as defined under Section 179D. (To say the related party rules of the code are bewildering would not give the complexity of the rules the justice they so deserve!) If you think your transaction may fall into the realm of the related party rules, you are strongly encouraged to consult your tax professional before making any definitive planning decisions.

Going forward, business owners and tax practitioners must look carefully at each partnership/LLC interest transaction and consider whether bonus depreciation considerations justify structuring the transaction as a cross-purchase, as opposed to a redemption.

If you are considering an ownership change in your entity and would like guidance regarding the material discussed in this article and other important considerations, contact us or reach out to Shane Wheeler, CPA, JD, supervisor, at 920-455-4280, or any member of Schenck’s Partnership team:

Brian Strnad, CPA, Shareholder | 920-455-4208
Mark Vance, CPA, Shareholder | 414-465-5535
Michael Zuleger, CPA, Senior Manager | 920-997-5333
Ryan Sonnenberg, CPA, Manager | 920-455-4150

Shane Wheeler, CPA, JD, is a supervisor with Schenck who focuses primarily on tax planning, compliance, and business consulting for closely held businesses and individuals. He is a member of the firm’s Manufacturing & Distribution and Real Estate & Construction teams.

Tags: Tax