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Federal Register / Vol. 68, No. 173 / Monday, September 8, 2003 / Rules and Regulations

DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9091]
RIN 1545–BC19

Special Depreciation Allowance
AGENCY: Internal Revenue Service (IRS),
Treasury.
ACTION: Final and temporary
regulations.
SUMMARY: This document contains
regulations relating to the depreciation
of property subject to section 168 of the
Internal Revenue Code (MACRS
property) and the depreciation of
computer software subject to section
167. Specifically, these regulations
provide guidance regarding the
additional first year depreciation
allowance provided by sections 168(k)
and 1400L(b) for certain MACRS
property and computer software. The
regulations reflect changes to the law
made by the Job Creation and Worker
Assistance Act of 2002 and the Jobs and
Growth Tax Relief Reconciliation Act of
2003. The text of these temporary
regulations also serves as the text of the
proposed regulations set forth in the
notice of proposed rulemaking on this
subject in the Proposed Rules section in
this issue of the Federal Register.
DATES: Effective Dates: These
regulations are effective September 8,
2003.
Applicability Dates: For dates of
applicability, see §§ 1.167(a)–14T(e),
1.168(d)–1T(d), 1.168(k)–1T(g), 1.169–
3T(g), and 1.1400L(b)–1T(g).
FOR FURTHER INFORMATION CONTACT:
Douglas Kim, (202) 622–3110 (not a tollfree number).
SUPPLEMENTARY INFORMATION:

Background
This document contains amendments
to 26 CFR part 1 to provide regulations
under sections 168(k) and 1400L(b) of
the Internal Revenue Code (Code).
Sections 168(k) and 1400L(b) were
added to the Code by, respectively,
sections 101 and 301(a) of the Job
Creation and Worker Assistance Act of
2002, Public Law 107–147 (116 Stat.
21), and were modified by section 201
of the Jobs and Growth Tax Relief
Reconciliation Act of 2003, Public Law
108–27 (117 Stat. 752).
Explanation of Provisions
Background
Section 167 allows as a depreciation
deduction a reasonable allowance for

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the exhaustion, wear, and tear of
property used in a trade or business or
held for the production of income. The
depreciation allowable for tangible,
depreciable property placed in service
after 1986 generally is determined under
section 168 (MACRS property). The
depreciation allowable for computer
software that is placed in service after
August 10, 1993, and is not an
amortizable section 197 intangible is
determined under section 167(f)(1).
Section 168(k)(1) allows a 30-percent
additional first year depreciation
deduction for qualified property
acquired after September 10, 2001, and,
in most cases, placed in service before
January 1, 2005. Section 168(k)(4)
allows a 50-percent additional first year
depreciation deduction for 50-percent
bonus depreciation property acquired
after May 5, 2003, and, in most cases,
placed in service before January 1, 2005.
Section 1400L(b) allows a 30-percent
additional first year depreciation
deduction for qualified New York
Liberty Zone property (Liberty Zone
property) acquired after September 10,
2001, and placed in service before
January 1, 2007 (January 1, 2010, in the
case of qualifying nonresidential real
property and residential rental
property).
Scope
The regulations provide the
requirements that must be met for
depreciable property to qualify for the
additional first year depreciation
deduction provided by sections 168(k)
and 1400L(b). Further, the regulations
instruct taxpayers how to determine the
additional first year depreciation
deduction and the amount of
depreciation otherwise allowable for
this property.
Property Eligible for the Additional First
Year Depreciation Deduction
The regulations provide that
depreciable property must meet four
requirements to be qualified property
under section 168(k)(2) (property for
which the 30-percent additional first
year depreciation deduction is
allowable) or 50-percent bonus
depreciation property under section
168(k)(4) (property for which the 50percent additional first year
depreciation deduction is allowable).
These requirements are: (1) The
depreciable property must be of a
specified type; (2) the original use of the
depreciable property must commence
with the taxpayer after September 10,
2001, for qualified property or after May
5, 2003, for 50-percent bonus
depreciation property; (3) the
depreciable property must be acquired

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by the taxpayer within a specified time
period; and (4) the depreciable property
must be placed in service by a specified
date. These requirements are more fully
discussed below.
Property of a Specified Type
The regulations provide that qualified
property or 50-percent bonus
depreciation property must be one of
the following: (1) MACRS property that
has a recovery period of 20 years of less;
(2) computer software as defined in, and
depreciated under, section 167(f)(1); (3)
water utility property as defined in
section 168(e)(5) and depreciated under
section 168; or (4) qualified leasehold
improvement property depreciated
under section 168. Because the
additional first year depreciation
deduction applies to MACRS property
that is depreciated under the general
depreciation system (GDS) or would be
depreciated under the GDS but for an
alternative depreciation system (ADS)
election made by the taxpayer, the
regulations provide that for purposes of
determining the eligibility of MACRS
property as qualified property or 50percent bonus depreciation property,
the recovery period applicable for the
MACRS property under section 168(c)
of the GDS is used regardless of any
election made by the taxpayer to
depreciate the class of property under
the ADS of section 168(g). Further, with
respect to qualified leasehold
improvement property, the regulations
define those improvements specified in
section 168(k)(3)(B) that are not
considered as qualified leasehold
improvement property.
The regulations also provide that
qualified property or 50-percent bonus
depreciation 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 depreciated under the
ADS; (3) any class of property for which
the taxpayer elects not to deduct the 30percent or 50-percent additional first
year depreciation; or (4) qualified New
York Liberty Zone leasehold
improvement property as defined in
section 1400L(c).
Property is required to be depreciated
under the ADS if the property is
described under section 168(g)(1)(A)
through (D) or if other provisions of the
Code require depreciation for the
property to be determined under the
ADS (for example, section 263A(e)(2)(A)
or section 280F(b)(1)). Thus, 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

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depreciation deduction (assuming all
other requirements are met).
With respect to the election out of the
additional first year depreciation
deduction, a taxpayer may elect out of
the 30-percent additional first year
depreciation deduction for any class of
qualified property. For any class of 50percent bonus depreciation property, a
taxpayer may elect either to deduct the
30-percent, instead of the 50-percent,
additional first year depreciation
deduction or to deduct no additional
first year depreciation deduction. The
regulations provide the rules for making
these elections and also define what is
a class of property for purposes of the
elections.
Original Use
Pursuant to section 168(k)(2)(A)(ii),
the regulations provide that qualified
property is property the original use of
which commences with the taxpayer
after September 10, 2001. Further,
pursuant to section 168(k)(4)(B)(i), the
regulations provide that 50-percent
bonus depreciation property is property
the original use of which commences
with the taxpayer after May 5, 2003. The
regulations provide that the original use
generally 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. Thus, new
property initially used by a taxpayer for
personal use and then subsequently
converted by the taxpayer for use in its
trade or business satisfies the original
use requirement. However, new
property acquired by a taxpayer for
personal use and then subsequently
acquired by a different taxpayer for use
in its trade or business does not satisfy
the original use requirement.
Likewise, additional capital
expenditures incurred by a taxpayer to
recondition or rebuild property acquired
or owned by the taxpayer satisfies the
original use requirement. However, the
cost of reconditioned or rebuilt property
acquired by the taxpayer does not
satisfy the original use requirement. The
question of whether property is
reconditioned or rebuilt property is a
question of fact. The regulations provide
a safe harbor that property containing
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. See Rev.
Rul. 68–111 (1968–1 C.B. 29).
The regulations also provide special
rules for certain sale-leaseback
transactions and syndication
transactions. If qualified property is
originally placed in service after
September 10, 2001, or 50-percent
bonus depreciation property is

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originally placed in service after May 5,
2003, by a person and the property is
involved in a sale-leaseback transaction
described in section 168(k)(2)(D)(ii), the
taxpayer-lessor is considered the
original user of the property. Likewise,
if qualified property is originally placed
in service by a lessor after September
10, 2001, or 50-percent bonus
depreciation property is originally
placed in service by a lessor after May
5, 2003, and 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, and the user of the property does
not change during this three-month
period, the purchaser of the property in
the last sale is considered the original
user of the property.
The regulations also provide that if in
the ordinary course of its business a
taxpayer sells fractional interests in
qualified property or 50-percent bonus
depreciation property to unrelated third
parties, each first fractional owner of the
property is considered as the original
user of its proportionate share of the
property. Furthermore, if a taxpayer
uses the qualified property or the 50percent bonus depreciation property
before all of the fractional interests are
sold and the property continues to be
held primarily for sale by the taxpayer,
the original use of any fractional interest
sold to an unrelated third party
subsequent to the taxpayer’s use begins
with the first purchaser of that interest.
Acquisition of Property
Pursuant to section 168(k)(2)(A)(iii),
the regulations provide that qualified
property is property: (1) Acquired by the
taxpayer after September 10, 2001, and
before January 1, 2005, but only if no
written binding contract for the
acquisition of the property was in effect
before September 11, 2001; or (2)
acquired by the taxpayer pursuant to a
written binding contract that was
entered into after September 10, 2001,
and before January 1, 2005. Further,
pursuant to section 168(k)(4)(B)(ii), the
regulations provide that 50-percent
bonus depreciation property is property
acquired by the taxpayer after May 5,
2003, and before January 1, 2005, but
only if no written binding contract for
the acquisition of the property was in
effect before May 6, 2003.
The regulations define a binding
contract as any contract that is
enforceable under State law against the
taxpayer or a predecessor, and does not
limit damages to a specified amount.
However, a contractual 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

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to a specified amount. Further, the fact
that there will be little or no damages
because the contract price does not
significantly differ from the fair market
value will not be taken into account in
determining whether a contract limits
damages.
The regulations also provide that a
contract is binding even if the contract
is subject to a condition, as long as the
condition is not within the control of
either one of the parties or a
predecessor. Further, an option to either
acquire or sell property is not treated as
a binding contract.
The regulations also provide that a
binding contract does not include a
supply agreement or similar agreement,
if the amount and design specifications
of the property to be purchased have not
been specified. In this case, the contract
is not treated as a binding contract until
both the amount and design
specifications are specified.
With respect to self-constructed
property, the regulations provide that
the property acquisition requirement is
met if a taxpayer manufactures,
constructs, or produces qualified
property or 50-percent bonus
depreciation property for its own use
and such manufacturing, construction,
or production began after, respectively,
September 10, 2001, or May 5, 2003,
and before January 1, 2005. Further,
property that is manufactured,
constructed, or produced for the
taxpayer by another person under a
written binding contract that is entered
into before the manufacture,
construction, or production of the
property begins is considered to be
manufactured, constructed, or produced
by the taxpayer.
The regulations also define when
construction begins. Construction of
qualified property or 50-percent bonus
depreciation property begins when
physical work of a significant nature
begins. Physical work does not include
preliminary activities such as planning
or designing, securing financing,
exploring, or researching. The
determination of when physical work of
a significant nature has begun depends
on the facts and circumstances. The
regulations, however, provide a safe
harbor that physical work of a
significant nature has begun when the
taxpayer incurs or pays more than 10
percent of the total cost of the property
(excluding the cost of any land and
preliminary activities).
The regulations also provide rules for
a contract to acquire, or for the
manufacture, construction, or
production of, a component of the larger
self-constructed property. If a binding
contract to acquire a component was in

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effect, or the manufacture, construction,
or production of a component began,
before September 11, 2001, for qualified
property or before May 6, 2003, for 50percent bonus depreciation property,
the component does not qualify for the
additional first year depreciation
deduction. Similarly, if a binding
contract to acquire a component was in
effect, or the manufacture, construction,
or production of a component began,
before September 11, 2001, for qualified
property or before May 6, 2003, for 50percent bonus depreciation property,
but the manufacture, construction, or
production of the larger self-constructed
property began after September 10,
2001, for qualified property, or after
May 5, 2003, for 50-percent bonus
depreciation property, and before
January 1, 2005, the larger selfconstructed property qualifies for the
additional first year depreciation
deduction (assuming all other
requirements are met) but the
component does not. Additionally, if
the manufacture, construction, or
production of the larger self-constructed
property began before September 11,
2001, for qualified property or before
May 6, 2003, for 50-percent bonus
depreciation property, the larger selfconstructed property and any acquired
or self-constructed component related to
the larger self-constructed property do
not qualify for the 30-percent or 50percent additional first year
depreciation deduction. However, if the
binding contract to acquire the
component was entered into, or the
manufacture, construction, or
production of the component began,
after September 10, 2001, for qualified
property, or after May 5, 2003, for 50percent bonus depreciation property,
and before January 1, 2005, but the
manufacture, construction, or
production of the larger self-constructed
property begins after December 31,
2004, the component qualifies for the
additional first year depreciation
deduction (assuming all other
requirements are met) but the larger selfconstructed property does not.
The regulations provide rules for
when certain acquired or selfconstructed property will not meet the
acquisition date requirement
(disqualified transactions). When the
user of property as of the date on which
the property was originally placed in
service, or a related party to the user,
acquired, or had a written binding
contract in effect for the acquisition of,
the property at any time before
September 11, 2001, or before May 6,
2003, as applicable, the property does
not qualify for the 30-percent or 50-

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percent additional first year
depreciation deduction. Similarly,
property manufactured, constructed, or
produced for the taxpayer or a related
party does not qualify for the 30-percent
or 50-percent additional first year
depreciation deduction if the
manufacture, construction, or
production began at any time before
September 11, 2001, or before May 6,
2003, as applicable. For this purpose,
persons are related if they have a
relationship specified in section 267(b)
or 707(b).
Placed-in-Service Date
Pursuant to section 168(k)(2)(A)(iv)
and 168(k)(4)(B)(iii), the regulations
provide that qualified property or 50percent bonus depreciation property is
property that is placed in service by the
taxpayer before January 1, 2005.
However, the placed in service date of
January 1, 2005, is extended for one year
to January 1, 2006, for property
described in section 168(k)(2)(B).
The regulations also provide special
rules for sale-leaseback transactions and
syndication transactions. If qualified
property is originally placed in service
after September 10, 2001, or 50-percent
bonus depreciation property is
originally placed in service after May 5,
2003, by a person and is involved in a
sale-leaseback transaction described in
section 168(k)(2)(D)(ii), the property is
treated as originally placed in service by
the taxpayer-lessor not earlier than the
date on which the property is used by
the lessee under the sale-leaseback.
Likewise, if qualified property is
originally placed in service by a lessor
after September 10, 2001, or 50-percent
bonus depreciation property is
originally placed in service by a lessor
after May 5, 2003, and 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, and the user of the
property does not change during this
three-month period, the property is
treated as originally placed in service
not earlier than the date of the last sale
by the purchaser of the property in the
last sale.
Special rules also are provided for
certain nonrecognition transactions. In
the case of a technical termination of a
partnership under section 708(b)(1)(B),
qualified property or 50-percent bonus
depreciation property placed in service
by the terminated partnership during
the taxable year of termination is treated
as originally placed in service by the
new partnership on the date the
qualified property or the 50-percent
bonus depreciation property is
contributed by the terminated

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partnership to the new partnership.
Additionally, qualified property or 50percent bonus depreciation property
transferred in a ‘‘step-in-the-shoes’’
transaction described in section
168(i)(7) in the taxable year the
qualified property or the 50-percent
bonus depreciation property is placed in
service by the transferor is treated as
originally placed in service on the date
the transferor placed the qualified
property or the 50-percent bonus
depreciation property in service.
Liberty Zone Property
Generally, the requirements for
determining the eligibility of property
for the additional first year depreciation
deduction for Liberty Zone property
provided by section 1400L(b) are similar
to the requirements for the 30-percent
additional first year depreciation
deduction for qualified property
provided by section 168(k)(1). There are,
however, some differences that are
discussed below.
The regulations provide that Liberty
Zone property includes the same
property that is described as qualified
property or 50-percent bonus
depreciation property for purposes of
section 168(k). In addition, Liberty Zone
property includes nonresidential real
property or residential rental property to
the extent such property rehabilitates
real property damaged, or replaces real
property destroyed or condemned, as a
result of the terrorist attacks of
September 11, 2001. Property is treated
as replacing destroyed or condemned
property if, as part of an integrated plan,
the property replaces real property that
is included in a continuous area that
includes real property destroyed or
condemned. Real property is considered
to have been destroyed or condemned
only if an entire building or structure
was destroyed or condemned as a result
of the terrorist attacks of September 11,
2001.
While Liberty Zone property includes
the same property that is described as
qualified property or 50-percent bonus
depreciation property for purposes of
section 168(k), only one additional first
year depreciation deduction is
allowable for the property. Thus,
pursuant to section 1400L(b)(2)(C)(i),
the regulations provide that if the 30percent or 50-percent additional first
year depreciation deduction under
section 168(k) applies to the property, it
is not Liberty Zone property.
Pursuant to section 1400L(b)(2)(A)(ii),
property is Liberty Zone property if
substantially all of the use of the
property is in the Liberty Zone and the
property is used in the active conduct
of a taxpayer’s trade or business in the

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Liberty Zone. The regulations provide
that the term substantially all means 80
percent or more.
In addition to the application of the
original use rules for qualified property,
the regulations provide that used
property will satisfy the original use
requirement for Liberty Zone property if
the used property has not been
previously used within the Liberty
Zone.
Pursuant to section 1400L(b)(2)(A)(iv),
the regulations provide that Liberty
Zone property is property that is
acquired by the taxpayer by purchase
after September 10, 2001, but only if no
written binding contract for the
acquisition of the property was in effect
before September 10, 2001. The term by
purchase is defined in section 179(d)
and § 1.179–4(c). The regulations also
provide that the binding contract rules
and the disqualified transactions rules
for qualified property apply to Liberty
Zone property. The self-construction
rules for qualified property also apply to
self-constructed Liberty Zone property
except that the requirement to begin the
manufacture, construction, or
production of the qualified property
before January 1, 2005, does not apply
to Liberty Zone property.
Finally, the regulations provide that
Liberty Zone property generally must be
acquired by a taxpayer after September
10, 2001, and placed in service by the
taxpayer before January 1, 2007.
However, qualifying nonresidential real
property and residential rental property
must be acquired by a taxpayer after
September 10, 2001, and placed in
service by the taxpayer before January 1,
2010.
Computation of Additional First Year
Depreciation Deduction and Otherwise
Allowable Depreciation
The allowable additional first year
depreciation deduction for qualified
property or Liberty Zone property is
equal to 30 percent of the unadjusted
depreciable basis (as defined in
§ 1.168(k)-1T(a)(2)(iii)) of the property.
The allowable additional first year
depreciation deduction for 50-percent
bonus depreciation property is equal to
50 percent of the unadjusted
depreciable basis (as defined in
§ 1.168(k)-1T(a)(2)(iii)) of the property.
For qualified property or 50-percent
bonus depreciation property described
in section 168(k)(2)(B) (property having
a longer production period), the
unadjusted depreciable basis (as defined
in § 1.168(k)-1T(a)(2)(iii)) of the
property is limited to the property’s
basis attributable to manufacture,
construction, or production of the
property before January 1, 2005.

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The additional first year depreciation
deduction is allowed for both regular
tax and alternative minimum tax
purposes. However, for alternative
minimum tax purposes, the amount of
the additional first year depreciation
deduction is based on the unadjusted
depreciable basis of the property for
alternative minimum tax purposes. The
amount of the additional first year
depreciation deduction is not affected
by a taxable year of less than 12 months
for either regular or alternative
minimum tax purposes.
Before determining the amount of
depreciation otherwise allowable for
qualified property, 50-percent bonus
depreciation property, or Liberty Zone
property, the taxpayer must first reduce
the unadjusted depreciable basis (as
defined in § 1.168(k)-1T(a)(2)(iii)) of the
property by the amount of the
additional first year depreciation
deduction allowed or allowable,
whichever is greater (the remaining
adjusted depreciable basis). Then, the
remaining adjusted depreciable basis is
depreciated using the applicable
depreciation provisions of the Code for
the property (that is, section 168 for
MACRS property and section 167(f)(1)
for computer software). This amount of
depreciation is allowed for both regular
tax and alternative minimum tax
purposes, and is affected by a taxable
year of less than 12 months. However,
for alternative minimum tax purposes,
the amount of depreciation allowed is
determined by calculating the remaining
adjusted depreciable basis of the
property for alternative minimum tax
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 depreciation for
qualified property, 50-percent bonus
depreciation property, or Liberty Zone
property that is MACRS property, the
regulations also provide that the
remaining adjusted depreciable basis of
the property is the basis to which the
annual depreciation rates in those tables
apply.
Special Rules
The regulations also provide rules for
the following situations: (1) Qualified
property, 50-percent bonus depreciation
property, or Liberty Zone property
placed in service and disposed of in the
same taxable year; (2) redetermination
of basis of qualified property, 50-percent
bonus depreciation property, or Liberty
Zone property; (3) recapture of
additional first year depreciation for
purposes of section 1245 and section

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1250; (4) a certified pollution control
facility that is qualified property, 50percent bonus depreciation property, or
Liberty Zone property; (5) like-kind
exchanges and involuntary conversions
of qualified property, 50-percent bonus
depreciation property, or Liberty Zone
property; (6) a change in use of qualified
property, 50-percent bonus depreciation
property, or Liberty Zone property; (7)
the computation of earnings and profits;
(8) the increase in the limitation of the
amount of depreciation for passenger
automobiles; and (9) the step-up in basis
due to a section 754 election.
With respect to qualified property, 50percent bonus depreciation property, or
Liberty Zone property placed in service
and disposed of in the same taxable
year, the regulations provide that the
additional first year depreciation
deduction is not allowed. This rule is
consistent with the general rule in
§ 1.168(d)-1(b)(3)(ii) for MACRS
property placed in service and disposed
of in the same taxable year. However, as
previously discussed, the additional
first year depreciation deduction is
allowable for qualified property, 50percent bonus depreciation property, or
Liberty Zone property placed in service
by a terminated partnership in the same
taxable year in which a technical
termination of the partnership occurs. In
this case, the new partnership, and not
the terminated partnership, claims the
additional first year depreciation
deduction. Similarly, the additional first
year depreciation deduction is
allowable for qualified property, 50percent bonus depreciation property, or
Liberty Zone property placed in service
by a transferor in the same taxable year
in which the property is transferred in
a step-in-the-shoes transaction
described in section 168(i)(7). In this
case, the additional first year
depreciation deduction for the
transferor’s taxable year in which the
property is placed in service is allocated
between the transferor and the
transferee on a monthly basis. The
allocation shall be made in accordance
with the rules in § 1.168(d)-1(b)(7)(ii) for
allocating the depreciation deduction
between the transferor and the
transferee.
The regulations also provide rules for
a redetermination of basis of qualified
property, 50-percent bonus depreciation
property, or Liberty Zone property (for
example, due to a contingent purchase
price or a discharge of indebtedness). If
the unadjusted depreciable basis of the
property is redetermined by the date on
which the property must be last placed
in service to meet the placed-in-service
date requirement in section
168(k)(2)(A)(iv), 168(k)(4)(B)(iii), or

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1400L(b)(2)(A)(v), the additional first
year depreciation deduction allowable
for the property is redetermined. If the
redetermination of basis occurs after
that date, the additional first year
depreciation deduction is not
redetermined. The regulations instruct
taxpayers how to determine the
depreciation adjustment for an increase
or decrease in basis. If there is an
increase in basis, the taxpayer claims
the additional first year depreciation
deduction attributable to the increase in
the taxable year in which the increase
occurs. If there is a decrease in basis, the
taxpayer includes in its income the
excess additional first year depreciation
deduction attributable to the decrease in
the taxable year in which the decrease
occurs.
Because the additional first year
depreciation deduction is not a ratable
method of computing depreciation, the
regulations provide that the additional
first year depreciation deduction is not
a straight line method for purposes of
section 1250. Thus, the additional first
year depreciation deduction is an
accelerated depreciation method for
purposes of determining recapture
under section 1250. For purposes of
section 1245, all depreciation
deductions are subject to recapture.
With respect to a certified pollution
control facility that is qualified
property, 50-percent bonus depreciation
property, or Liberty Zone property, the
regulations provide that the additional
first year depreciation deduction is
allowable in the facility’s placed in
service year even if the taxpayer elects
to amortize the basis of the facility
under section 169 in the placed-inservice year. The regulations also amend
the regulations under section 169 to
provide that the amortizable basis under
section 169 must be reduced by the
additional first year depreciation
deduction allowed or allowable,
whichever is greater, applicable to the
facility.
With respect to MACRS property or
computer software acquired in a likekind exchange under section 1031 or as
a result of an involuntary conversion
under section 1033, the regulations
provide that the carryover basis and the
excess basis, if any, of the acquired
MACRS property or acquired computer
software are eligible for the additional
first year depreciation deduction if the
acquired MACRS property or acquired
computer software is qualified property,
50-percent bonus depreciation property,
or Liberty Zone property. However, if
qualified property, 50-percent bonus
depreciation property, or Liberty Zone
property is placed in service and then
disposed of in an exchange or

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involuntary conversion in the same
taxable year, the unadjusted depreciable
basis of the exchanged or involuntarily
converted property is not eligible for the
additional first year depreciation
deduction.
The regulations also provide rules
when the use of qualified property, 50percent bonus depreciation property, or
Liberty Zone property changes in the
hands of the same taxpayer during the
placed-in-service year or a subsequent
taxable year. The regulations provide
that no additional first year depreciation
deduction is allowed for qualified
property, 50-percent bonus depreciation
property, or Liberty Zone property
converted to personal use in the placedin-service year. However, property
converted to business or incomeproducing use is eligible for the
additional first year depreciation
deduction in the taxable year the
property is converted to business or
income-producing use (assuming all the
requirements are met). With respect to
a change in the use of depreciable
property subsequent to the placed-inservice year, the regulations provide
that the change in the use will not affect
the determination of whether the
property was eligible for the additional
first year depreciation deduction in the
taxable year the property was originally
placed-in-service. Thus, if property is
not qualified property in its placed-inservice year and a change in the use in
a subsequent taxable year would result
in the property being qualified property,
no additional first year depreciation
deduction is allowed for the property.
Likewise, if property is qualified
property in its placed-in-service year
and a change in the use in a subsequent
taxable year would result in the
property no longer being qualified
property, the additional first year
depreciation deduction allowable for
the property in its placed-in-service year
is not redetermined.
Furthermore, the regulations provide
that the additional first year
depreciation deduction is not allowable
for purposes of computing earnings and
profits. Pursuant to section 168(k)(2)(E)
and (4)(D), the regulations also provide
the increase in the limitation under
section 280F(a)(1) of the amount of
depreciation for certain passenger
automobiles that are qualified property
or 50-percent bonus depreciation
property. Finally, the regulations
provide that any increase in basis of
qualified property, 50-percent bonus
depreciation property, or Liberty Zone
property due to a section 754 election
generally is not eligible for the
additional first year depreciation
deduction because any such increase in

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basis of property does not satisfy the
original use requirement.
Special Analyses
It has been determined that this
Treasury decision is not a significant
regulatory action as defined in
Executive Order 12866. Therefore, a
regulatory assessment is not required. It
also has been determined that section
553(b) of the Administrative Procedure
Act (5 U.S.C. chapter 5) does not apply
to these regulations and, because these
regulations do not impose on small
entities a collection of information
requirement, the Regulatory Flexibility
Act (5 U.S.C. chapter 6) does not apply.
Therefore, a Regulatory Flexibility
Analysis is not required. Pursuant to
section 7805(f) of the Code, these
temporary regulations will be submitted
to the Chief Counsel for Advocacy of the
Small Business Administration for
comment on its impact on small
business.
Drafting Information
The principal author of these
regulations is Douglas H. Kim, Office of
Associate Chief Counsel (Passthroughs
and Special Industries). However, other
personnel from the IRS and Treasury
Department participated in their
development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and
recordkeeping requirements.
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 1 is amended
as follows:

■

PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read in part as
follows:

■

Authority: 26 U.S.C. 7805 * * *

Par. 2. Section 1.167(a)–14 is amended
by:
■ 1. Revising paragraphs (b)(1) and (e)(2).
■ 2. Revising paragraph heading (e).
■ 3. Adding paragraph (e)(3).
The additions and revisions read as
follows:
■

§ 1.167(a)–14 Treatment of certain
intangible property excluded from section
197.

*

*
*
*
*
(b) * * *
(1) In general. [Reserved]. For further
guidance, see § 1.167(a)–14T(b)(1).
*
*
*
*
*
(e) Effective dates * * *
(2) Change in method of accounting.
[Reserved]. For further guidance, see
§ 1.167(a)–14T(e)(2).

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(3) Qualified property, 50-percent
bonus depreciation property, qualified
New York Liberty Zone property, or
section 179 property. [Reserved]. For
further guidance, see § 1.167(a)–
14T(e)(3).
■ Par. 3. Section 1.167(a)–14T is added
to read as follows:
§ 1.167(a)–14T Treatment of certain
intangible property excluded from section
197 (temporary).

(a) For further guidance, see
§ 1.167(a)–14(a).
(b) Computer software—(1) In general.
The amount of the deduction for
computer software described in section
167(f)(1) and § 1.197–2(c)(4) is
determined by amortizing the cost or
other basis of the computer software
using the straight line method described
in § 1.167(b)–1 (except that its salvage
value is treated as zero) and an
amortization period of 36 months
beginning on the first day of the month
that the computer software is placed in
service. Before determining the
amortization deduction allowable under
this paragraph (b), the cost or other basis
of computer software that is section 179
property, as defined in section
179(d)(1)(A)(ii), must be reduced for any
portion of the basis the taxpayer
properly elects to treat as an expense
under section 179. In addition, the cost
or other basis of computer software that
is qualified property under section
168(k)(2) or § 1.168(k)–1T, 50-percent
bonus depreciation property under
section 168(k)(4) or § 1.168(k)–1T, or
qualified New York Liberty Zone
property under section 1400L(b) or
§ 1.1400L(b)–1T, must be reduced by the
amount of the additional first year
depreciation deduction allowed or
allowable, whichever is greater, under
section 168(k) or section 1400L(b) for
the computer software. If costs for
developing computer software that the
taxpayer properly elects to defer under
section 174(b) result in the development
of property subject to the allowance for
depreciation under section 167, the
rules of this paragraph (b) will apply to
the unrecovered costs. In addition, this
paragraph (b) applies to the cost of
separately acquired computer software
if the cost to acquire the software is
separately stated and the cost is
required to be capitalized under section
263(a).
(b)(2) through (e)(1) For further
guidance, see § 1.167(a)–14(b)(2)
through (e)(1).
(e)(2) Change in method of
accounting. See § 1.197–2(l)(4) for rules
relating to changes in method of
accounting for property to which
§ 1.167(a)–14T applies. However, see

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52991

§ 1.168(k)–1T(g)(4) or 1.1400L(b)–
1T(g)(4) for rules relating to changes in
method of accounting for computer
software to which the third sentence in
§ 1.167(a)–14T(b)(1) applies.
(3) Qualified property, 50-percent
bonus depreciation property, qualified
New York Liberty Zone property, or
section 179 property. This section also
applies to computer software that is
qualified property under section
168(k)(2) or qualified New York Liberty
Zone property under section 1400L(b)
acquired by a taxpayer after September
10, 2001, and to computer software that
is 50-percent bonus depreciation
property under section 168(k)(4)
acquired by a taxpayer after May 5,
2003. This section also applies to
computer software that is section 179
property placed in service by a taxpayer
in a taxable year beginning after 2002
and before 2006. This section expires on
September 8, 2006.
■ Par. 4. Section 1.168(d)–1 is amended
by:
■ 1. Revising paragraph (b)(3)(ii).
■ 2. Paragraph heading (d) is revised and
the text of paragraph (d) is redesignated
as paragraph (d)(1).
■ 3. Adding paragraph (d)(2).
The additions and revisions read as
follows:

and disposed of during the same taxable
year. However, see § 1.168(k)–1T(f)(1)
for qualified property or 50-percent
bonus depreciation property, and
§ 1.1400L(b)–1T(f)(1) for qualified New
York Liberty Zone property, that is
placed in service in the same taxable
year in which either a partnership is
terminated as a result of a technical
termination under section 708(b)(1)(B)
or the property is transferred in a
transaction described in section
168(i)(7).
(b)(3)(iii) through (d)(1) For further
guidance, see § 1.168(d)–1(b)(3)(iii)
through (d)(1).
(d)(2) Qualified property, 50-percent
bonus depreciation property, or
qualified New York Liberty Zone
property. This section also applies to
qualified property under section
168(k)(2) or qualified New York Liberty
Zone property under section 1400L(b)
acquired by a taxpayer after September
10, 2001, and to 50-percent bonus
depreciation property under section
168(k)(4) acquired by a taxpayer after
May 5, 2003. This section expires on
September 8, 2006.
■ Par. 6. Section 1.168(k)–0T is added to
read as follows:

§ 1.168(d)–1 Applicable conventions—halfyear and mid-quarter conventions.

This section lists the headings that
appear in § 1.168(k)–1T.

*

§ 1.168(k)–1T Additional first year
depreciation deduction (temporary).
(a) Scope and definitions.
(1) Scope.
(2) Definitions.
(b) Qualified property or 50-percent bonus
depreciation property.
(1) In general.
(2) Description of qualified property or 50percent bonus depreciation property.
(i) In general.
(ii) Property not eligible for additional first
year depreciation deduction.
(A) Property that is not qualified property.
(B) Property that is not 50-percent bonus
depreciation property.
(3) Original use.
(i) In general.
(ii) Conversion to business or incomeproducing use.
(iii) Sale-leaseback and syndication
transactions.
(A) Sale-leaseback transaction.
(B) Syndication transaction.
(C) Sale-leaseback transaction followed by
a syndication transaction.
(iv) Fractional interests in property.
(v) Examples.
(4) Acquisition of property.
(i) In general.
(A) Qualified property.
(B) 50-percent bonus depreciation
property.
(ii) Definition of binding contract.
(A) In general.
(B) Conditions.

*
*
*
*
(b) * * *
(3) * * *
(ii) [Reserved]. For further guidance,
see § 1.168(d)–1T(b)(3)(ii).
*
*
*
*
*
(d) Effective dates—(1) In general.
* * *
(2) Qualified property, 50-percent
bonus depreciation property, or
qualified New York Liberty Zone
property. [Reserved]. For further
guidance, see § 1.168(d)–1T(d).
■ Par. 5. Section 1.168(d)–1T is added to
read as follows:
§ 1.168(d)–1T Applicable conventions—
half-year and mid-quarter conventions
(temporary).

(a) through (b)(3)(i) For further
guidance, see § 1.168(d)–1(a) through
(b)(3)(i).
(b)(3)(ii) The applicable convention,
as determined under this section,
applies to all depreciable property
(except nonresidential real property,
residential rental property, and any
railroad grading or tunnel bore) placed
in service during the taxable year,
excluding property placed in service
and disposed of in the same taxable
year. No depreciation deduction is
allowed for property placed in service

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§ 1.168(k)–0T
(temporary).

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(C) Options.
(D) Supply agreements.
(E) Components.
(iii) Self-constructed property.
(A) In general.
(B) When does construction begin.
(C) Components of self-constructed
property.
(1) Acquired components.
(2) Self-constructed components.
(iv) Disqualified transactions.
(A) In general.
(B) Related party defined.
(v) Examples.
(5) Placed-in-service date.
(i) In general.
(ii) Sale-leaseback and syndication
transactions.
(A) Sale-leaseback transaction.
(B) Syndication transaction.
(C) Sale-leaseback transaction followed by
a syndication transaction.
(iii) Technical termination of a partnership.
(iv) Section 168(i)(7) transactions.
(c) Qualified leasehold improvement
property.
(1) In general.
(2) Certain improvements not included.
(3) Definitions.
(d) Computation of depreciation deduction
for qualified property or 50-percent bonus
depreciation property.
(1) Additional first year depreciation
deduction.
(i) In general.
(ii) Property having a longer production
period.
(iii) Alternative minimum tax.
(2) Otherwise allowable depreciation
deduction.
(i) In general.
(ii) Alternative minimum tax.
(3) Examples.
(e) Election not to deduct additional first
year depreciation.
(1) In general.
(i) Qualified property.
(ii) 50-percent bonus depreciation
property.
(2) Definition of class of property.
(3) Time and manner for making election.
(i) Time for making election.
(ii) Manner of making election.
(4) Special rules for 2000 or 2001 returns.
(5) Failure to make election.
(f) Special rules.
(1) Property placed in service and disposed
of in the same taxable year.
(i) In general.
(ii) Technical termination of a partnership.
(iii) Section 168(i)(7) transactions.
(iv) Examples.
(2) Redetermination of basis.
(i) Increase in basis.
(ii) Decrease in basis.
(iii) Definition.
(iv) Examples.
(3) Section 1245 and 1250 depreciation
recapture.
(4) Coordination with section 169.
(5) Like-kind exchanges and involuntary
conversions.
(i) Scope.
(ii) Definitions.
(iii) Computation.
(A) In general.

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(B) Year of disposition and year of
replacement.
(iv) Sale-leasebacks.
(v) Examples.
(6) Change in use.
(i) Change in use of depreciable property.
(ii) Conversion to personal use.
(iii) Conversion to business or incomeproducing use.
(A) During the same taxable year.
(B) Subsequent to the acquisition year.
(iv) Depreciable property changes use
subsequent to the placed-in-service year.
(v) Examples.
(7) Earnings and profits.
(8) Limitation of amount of depreciation
for certain passenger automobiles.
(9) Section 754 election.
(g) Effective date.
(1) In general.
(2) Technical termination of a partnership
or section 168(i)(7) transactions.
(3) Like-kind exchanges and involuntary
conversions.
(4) Change in method of accounting.
(i) Special rules for 2000 or 2001 returns.
(ii) Like-kind exchanges and involuntary
conversions.

Par. 7. Section 1.168(k)–1T is added to
read as follows:

■

§ 1.168(k)–1T Additional first year
depreciation deduction (temporary).

(a) Scope and definitions—(1) Scope.
This section provides the rules for
determining the 30-percent additional
first year depreciation deduction
allowable under section 168(k)(1) for
qualified property and the 50-percent
additional first year depreciation
deduction allowable under section
168(k)(4) for 50-percent bonus
depreciation property.
(2) Definitions. For purposes of
section 168(k) and this section, the
following definitions apply:
(i) Depreciable property is property
that is of a character subject to the
allowance for depreciation as
determined under section 167 and the
regulations thereunder.
(ii) MACRS property is tangible,
depreciable property that is placed in
service after December 31, 1986 (or after
July 31, 1986, if the taxpayer made an
election under section 203(a)(1)(B) of
the Tax Reform Act of 1986; 100 Stat.
2143) and subject to section 168, except
for property excluded from the
application of section 168 as a result of
section 168(f) or as a result of a
transitional rule.
(iii) Unadjusted depreciable basis is
the basis of property for purposes of
section 1011 without regard to any
adjustments described in section
1016(a)(2) and (3). This basis reflects the
reduction in basis for the percentage of
the taxpayer’s use of property for the
taxable year other than in the taxpayer’s
trade or business (or for the production

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of income), for any portion of the basis
the taxpayer properly elects to treat as
an expense under section 179, and for
any adjustments to basis provided by
other provisions of the Internal Revenue
Code and the regulations thereunder
(other than section 1016(a)(2) and (3))
(for example, a reduction in basis by the
amount of the disabled access credit
pursuant to section 44(d)(7)). For
property subject to a lease, see section
167(c)(2).
(iv) Adjusted depreciable basis is the
unadjusted depreciable basis of the
property, as defined in § 1.168(k)–
1T(a)(2)(iii), less the adjustments
described in section 1016(a)(2) and (3).
(b) Qualified property or 50-percent
bonus depreciation property—(1) In
general. Qualified property or 50percent bonus depreciation property is
depreciable property that—
(i) Meets the requirements in
§ 1.168(k)–1T(b)(2) (description of
property);
(ii) Meets the requirements in
§ 1.168(k)–1T(b)(3) (original use);
(iii) Meets the requirements in
§ 1.168(k)–1T(b)(4) (acquisition of
property); and
(iv) Meets the requirements in
§ 1.168(k)–1T(b)(5) (placed-in-service
date).
(2) Description of qualified property
or 50-percent bonus depreciation
property—(i) In general. Depreciable
property will meet the requirements of
this paragraph (b)(2) if the property is—
(A) MACRS property (as defined in
§ 1.168(k)–1T(a)(2)(ii)) that has a
recovery period of 20 years or less. For
purposes of this paragraph (b)(2)(i)(A)
and section 168(k)(2)(B)(i)(II) and
168(k)(4)(C), the recovery period is
determined in accordance with section
168(c) regardless of any election made
by the taxpayer under section 168(g)(7);
(B) Computer software as defined in,
and depreciated under, section 167(f)(1)
and the regulations thereunder;
(C) Water utility property as defined
in section 168(e)(5) and depreciated
under section 168; or
(D) Qualified leasehold improvement
property as defined in paragraph (c) of
this section and depreciated under
section 168.
(ii) Property not eligible for additional
first year depreciation deduction—(A)
Property that is not qualified property.
For purposes of the 30-percent
additional first year depreciation
deduction, depreciable property will not
meet the requirements of this paragraph
(b)(2) if the property is—
(1) Described in section 168(f);
(2) Required to be depreciated under
the alternative depreciation system of
section 168(g) pursuant to section

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168(g)(1)(A) through (D) or other
provisions of the Internal Revenue Code
(for example, property described in
section 263A(e)(2)(A) or section
280F(b)(1));
(3) Included in any class of property
for which the taxpayer elects not to
deduct the 30-percent additional first
year depreciation (for further guidance,
see paragraph (e) of this section); or
(4) Qualified New York Liberty Zone
leasehold improvement property as
defined in section 1400L(c)(2).
(B) Property that is not 50-percent
bonus depreciation property. For
purposes of the 50-percent additional
first year depreciation deduction,
depreciable property will not meet the
requirements of this paragraph (b)(2) if
the property is—
(1) Described in paragraph
(b)(2)(ii)(A)(1), (2), or (4) of this section;
or
(2) Included in any class of property
for which the taxpayer elects the 30percent, instead of the 50-percent,
additional first year depreciation
deduction or elects not to deduct any
additional first year depreciation (for
further guidance, see paragraph (e) of
this section).
(3) Original use—(i) In general. For
purposes of the 30-percent additional
first year depreciation deduction,
depreciable property will meet the
requirements of this paragraph (b)(3) if
the original use of the property
commences with the taxpayer after
September 10, 2001. For purposes of the
50-percent additional first year
depreciation deduction, depreciable
property will meet the requirements of
this paragraph (b)(3) if the original use
of the property commences with the
taxpayer after May 5, 2003. Except as
provided in paragraph (b)(3)(iii) and (iv)
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.
Thus, additional capital expenditures
incurred by a taxpayer to recondition or
rebuild property acquired or owned by
the taxpayer satisfies the original use
requirement. However, the cost of
reconditioned or rebuilt property
acquired by the taxpayer does not
satisfy the original use requirement. The
question of whether property is
reconditioned or rebuilt property is a
question of fact. For purposes of this
paragraph (b)(3)(i), 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.
(ii) Conversion to business or incomeproducing use. If a taxpayer initially
acquires new property for personal use

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and subsequently uses the property in
the taxpayer’s trade or business or for
the taxpayer’s production of income, the
taxpayer is considered as the original
user of the property. If a person initially
acquires new property for personal use
and a taxpayer subsequently acquires
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.
(iii) Sale-leaseback and syndication
transactions—(A) Sale-leaseback
transaction. If new property is originally
placed in service by a person after
September 10, 2001 (for qualified
property), or after May 5, 2003 (for 50percent bonus depreciation property),
and is sold to a taxpayer and leased
back to the person by the taxpayer
within three months after the date the
property was originally placed in
service by the person, the taxpayerlessor is considered the original user of
the property.
(B) Syndication transaction. If new
property is originally placed in service
by a lessor (including by operation of
paragraph (b)(5)(ii)(A) of this section)
after September 10, 2001 (for qualified
property), or after May 5, 2003 (for 50percent bonus depreciation property),
and 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, 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
original user of the property.
(C) Sale-leaseback transaction
followed by a syndication transaction. If
a sale-leaseback transaction that satisfies
the requirements in paragraph
(b)(3)(iii)(A) of this section is followed
by a syndication transaction that
satisfies the requirements in paragraph
(b)(3)(iii)(B) of this section, the original
user of the property is determined in
accordance with paragraph (b)(3)(iii)(B)
of this section.
(iv) Fractional interests in property. If,
in the ordinary course of its business, a
taxpayer sells fractional interests in
property to unrelated third parties, each
first fractional owner of the property is
considered as the original user of its
proportionate share of the property.
Furthermore, if the taxpayer uses the
property before all of the fractional
interests of the property are sold but the
property continues to be held primarily
for sale by the taxpayer, the original use
of any fractional interest sold to an

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52993

unrelated third party 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)(iv), persons are not related if they
do not have a relationship described in
section 267(b) or 707(b) and the
regulations thereunder.
(v) Examples. The application of this
paragraph (b)(3) is illustrated by the
following examples:
Example 1. On August 1, 2002, A buys
from B for $20,000 a machine that has been
previously used by B in B’s trade or business.
On March 1, 2003, A makes a $5,000 capital
expenditure to recondition the machine. The
$20,000 purchase price does not qualify for
the additional first year depreciation
deduction because the original use
requirement of this paragraph (b)(3) is not
met. However, the $5,000 expenditure
satisfies the original use requirement of this
paragraph (b)(3) and, assuming all other
requirements are met, qualifies for the 30percent 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 primarily
for sale to customers in the ordinary course
of its business. On September 1, 2002, D buys
from C an automobile that was previously
used as a demonstrator 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 purposes of
the original use requirement and, therefore,
D will be considered the original user of the
automobile for purposes of this paragraph
(b)(3). Assuming all other requirements are
met, D’s purchase price of the automobile
qualifies for the 30-percent additional first
year depreciation deduction for D, subject to
any limitation under section 280F.
Example 3. On April 1, 2000, E acquires a
horse to be used in E’s thoroughbred racing
business. On October 1, 2003, F buys the
horse from E and will use the horse in F’s
horse breeding business. The use of the horse
by E in its racing business prevents the
original use of the horse from commencing
with F. Thus, F’s purchase price of the horse
does not qualify for the additional first year
depreciation deduction.
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 January 1, 2003, G sells five of
the eight fractional interests in the aircraft to
H, an unrelated party, and H begins to use
its proportionate share of the aircraft
immediately upon purchase. On June 1,
2003, G sells to I, an unrelated party to G and
H, the remaining unsold 3/8 fractional
interests in the aircraft. H is considered the
original user as to its 5/8 fractional interest
in the aircraft and I is considered the original
user as to its 3/8 fractional interest in the
aircraft. Thus, assuming all other
requirements are met, H’s purchase price for

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its 5/8 fractional interest in the aircraft
qualifies for the 30-percent additional first
year depreciation deduction and I’s purchase
price for its 3/8 fractional interest in the
aircraft qualifies for the 50-percent additional
first year depreciation deduction.

(4) Acquisition of property—(i) In
general—(A) Qualified property. For
purposes of the 30-percent additional
first year depreciation deduction,
depreciable property will meet the
requirements of this paragraph (b)(4) if
the property is—
(1) Acquired by the taxpayer after
September 10, 2001, and before January
1, 2005, but only if no written binding
contract for the acquisition of the
property was in effect before September
11, 2001; or
(2) Acquired by the taxpayer pursuant
to a written binding contract that was
entered into after September 10, 2001,
and before January 1, 2005.
(B) 50-percent bonus depreciation
property. For purposes of the 50-percent
additional first year depreciation
deduction, depreciable property will
meet the requirements of this paragraph
(b)(4) if the property is acquired by the
taxpayer after May 5, 2003, and before
January 1, 2005, but only if no written
binding contract for the acquisition of
the property was in effect before May 6,
2003.
(ii) 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
damages provision). For this purpose, a
contractual 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 market
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
contained no provision for liquidated
damages, 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 difference 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 by the seller, 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

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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 because
any term is to be determined by a
standard beyond the control of either
party. A contract that imposes
significant obligations on the taxpayer
or a predecessor will be treated as
binding notwithstanding the fact that
insubstantial terms remain to be
negotiated by the parties to the contract.
(C) Options. An option to either
acquire or sell property is not a binding
contract.
(D) Supply agreements. A binding
contract does not include a supply or
similar agreement if the amount and
design specifications 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 specifications of, and the pricing
for, the property to be purchased, a
purchase order under the agreement for
a specific number of assets is treated as
a binding contract.
(E) 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
requirements of this paragraph (b)(4),
the component does not qualify for the
30-percent or 50-percent additional first
year depreciation deduction, as
applicable.
(iii) Self-constructed property—(A) In
general. If a taxpayer manufactures,
constructs, or produces property for use
by the taxpayer in its trade or business
(or for its production of income), the
acquisition rules in paragraph (b)(4)(i) of
this section are treated as met for
qualified property if the taxpayer begins
manufacturing, constructing, or
producing the property after September
10, 2001, and before January 1, 2005,
and for 50-percent bonus depreciation
property if the taxpayer begins
manufacturing, constructing, or
producing the property after May 5,
2003, and before January 1, 2005.
Property that is manufactured,
constructed, or produced for the
taxpayer by another person under a
written binding contract (as defined in
paragraph (b)(4)(ii) 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

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manufactured, constructed, or produced
by the taxpayer.
(B) When does construction begin. For
purposes of paragraph (b)(4)(iii) of this
section, construction of property begins
when physical work of a significant
nature begins. Physical work does not
include preliminary activities such as
planning or designing, securing
financing, exploring, or researching. The
determination of when physical work of
a significant nature begins depends on
the facts and circumstances. For
purposes of this paragraph (b)(4)(iii)(B),
physical work of a significant nature
will not be considered to begin before
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
planning or designing, securing
financing, exploring, or researching).
For example, if a retail motor fuels
outlet is to be constructed on-site,
construction begins 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 excation to change the
contour of the land (as distinguished
from excavation for footings) does not
constitute the beginning of construction.
However, if a retail motor fuels outlet is
to be assembled on-site from modular
units constructed off-site and delivered
to the site where the outlet will be used,
construction begings when physical
work of a significant nature commences
at the off-site location.
(C) Components of self-constructed
property—(1) Acquired components. If a
binding contract (as defined in
paragraph (b)(4)(ii) of this section) to
acquire a component does not satisfy
the requirements of paragraph (b)(4)(i)
of this section, the component does not
qualify for the 30-percent or 50-percent
additional first year depreciation
deduction, as applicable. A binding
contract (as defined in paragraph
(b)(4)(ii) of this section) to acquire one
or more components of a larger selfconstructed property will not preclude
the larger self-constructed property from
satisfying the acquisition rules in
paragraph (b)(4)(iii)(A) of this section.
Accordingly, the unadjusted depreciable
basis of the larger self-constructed
property that is eligible for the 30percent or 50-percent additional first
year depreciation deduction, as
applicable (assuming all other
requirements are met), must not include

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the unadjusted depreciable basis of any
component that does not satisfy the
requirements of paragraph (b)(4)(i) of
this section. If the manufacture,
construction, or production of the larger
self-constructed property begins before
September 11, 2001, for qualified
property, or before May 6, 2003, for 50percent bonus depreciation property,
the larger self-constructed property and
any acquired components related to the
larger self-constructed property do not
qualify for the 30-percent or 50-percent
additional first year depreciation
deduction, as applicable. If a binding
contract to acquire the component is
entered into after September 10, 2001,
for qualified property, or after May 5,
2003, for 50-percent bonus depreciation
property, and before January 1, 2005,
but the manufacture, construction, or
production of the larger self-constructed
property does not begin before January
1, 2005, the component qualifies for the
additional first year depreciation
deduction (assuming all other
requirements are met) but the larger selfconstructed property does not.
(2) Self-constructed components. If
the manufacture, construction, or
production of a component does not
satisfy the requirements of paragraph
(b)(4)(iii)(A) of this section, the
component does not qualify for the 30percent or 50-percent additional first
year depreciation deduction, as
applicable. However, if the
manufacture, construction, or
production of a component does not
satisfy the requirements of paragraph
(b)(4)(iii)(A) of this section, but the
manufacture, construction, or
production of the larger self-constructed
property satisfies the requirements of
paragraph (b)(4)(iii)(A) of this section,
the larger self-constructed property
qualifies for the 30-percent or 50percent additional first year
depreciation deduction, as applicable
(assuming all other requirements are
met) even though the component does
not qualify for the 30-percent or 50percent additional first year
depreciation deduction. Accordingly,
the unadjusted depreciable basis of the
larger self-constructed property that is
eligible for the 30-percent or 50-percent
additional first year depreciation
deduction, as applicable (assuming all
other requirements are met), must not
include the unadjusted depreciable
basis of any component that does not
qualify for the 30-percent or 50-percent
additional first year depreciation
deduction. If the manufacture,
construction, or production of the larger
self-constructed property began before
September 11, 2001, for qualified

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property, or before May 6, 2003, for 50percent bonus depreciation property,
the larger self-constructed property and
any self-constructed components related
to the larger self-constructed property
do not qualify for the 30-percent or 50percent additional first year
depreciation deduction, as applicable. If
the manufacture, construction, or
production of a component begins after
September 10, 2001, for qualified
property, or after May 5, 2003, for 50percent bonus depreciation property,
and before January 1, 2005, but the
manufacture, construction, or
production of the larger self-constructed
property does not begin before January
1, 2005, the component qualifies for the
additional first year depreciation
deduction (assuming all other
requirements are met) but the larger selfconstructed property does not.
(iv) Disqualified transactions—(A) In
general. Property does not satisfy the
requirements of this paragraph (b)(4) if
the user of the property as of the date
on which the property was originally
placed in service (including by
operation of paragraph (b)(5)(ii), (iii),
and (iv) of this section), or a related
party to the user, acquired, or had a
written binding contract (as defined in
paragraph (b)(4)(ii) of this section) in
effect for the acquisition of, the property
at any time before September 11, 2001
(for qualified property), or before May 6,
2003 (for 50-percent bonus depreciation
property). In addition, property
manufactured, constructed, or produced
for the taxpayer or a related party does
not satisfy the requirements of this
paragraph (b)(4) if the manufacture,
construction, or production of the
property for the taxpayer or a related
party began at any time before
September 11, 2001 (for qualified
property), or before May 6, 2003 (for 50percent bonus depreciation property).
(B) Related party defined. For
purposes of this paragraph (b)(4)(iv),
persons are related if they have a
relationship specified in section 267(b)
or 707(b) and the regulations
thereunder.
(v) Examples. The application of this
paragraph (b)(4) is illustrated by the
following examples:
Example 1. On September 1, 2001, J, a
corporation, entered into a written agreement
with K, a manufacturer, to purchase 20 new
lamps for $100 each within the next two
years. Although the agreement 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)(4)(ii)(D) of this section.
Example 2. Same facts as Example 1. On
December 1, 2001, J placed a purchase order

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52995

with K to purchase 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 J with K on December 1, 2001, is
a binding contract pursuant to paragraph
(b)(4)(ii)(D) of this section. Accordingly, the
cost of the 20 lamps qualifies for the 30percent additional first year depreciation
deduction.
Example 3. Same facts as Example 1 except
that the written agreement between J and K
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
paragraph (b)(4)(ii)(D) of this section.
Accordingly, because the agreement was
entered into before September 11, 2001, any
lamp acquired by J under this contract does
not qualify for the additional first year
depreciation deduction.
Example 4. On September 1, 2001, L began
constructing an electric generation power
plant for its own use. On November 1, 2002,
L ceases construction of the power plant
prior to its completion. Between September
1, 2001, and November 1, 2002, L incurred
$3,000,000 for the construction of the power
plant. On May 6, 2003, L resumed
construction of the power plant and
completed its construction on August 31,
2003. Between May 6, 2003, and August 31,
2003, L incurred another $1,600,000 to
complete the construction of the power plant
and, on September 1, 2003, L placed the
power plant in service. None of L’s total
expenditures of $4,600,000 qualify for the
additional first year depreciation deduction
because, pursuant to paragraph (b)(4)(iii)(A)
of this section, L began constructing the
power plant before September 11, 2001.
Example 5. Same facts as Example 4 except
that L began constructing the electric
generation power plant for its own use on
October 1, 2001. L’s total expenditures of
$4,600,000 qualify for the additional first
year depreciation deduction because,
pursuant to paragraph (b)(4)(iii)(A) of this
section, L began constructing the power plant
after September 10, 2001, and placed the
power plant in service before January 1,
2005. Accordingly, the additional first year
depreciation deduction for the power plant
will be $1,380,000, computed as $4,600,000
multiplied by 30 percent.
Example 6. On August 1, 2001, M entered
into a written binding contract to acquire a
new turbine. The new turbine is a component
part of a new electric generation power plant
that is being constructed on M’s behalf. The
construction of the new electric generation
power plant commenced in November 2001,
and the new electric generation power plant
was completed in November 2002. Because
M entered into a written binding contract to
acquire a component part (the new turbine)
prior to September 11, 2001, pursuant to
paragraph (b)(4)(iii)(C) of this section, the
component part does not qualify for the
additional first year depreciation deduction.
However, pursuant to paragraphs
(b)(4)(iii)(A) and (C) of this section, the new

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plant constructed for M will qualify for the
30-percent additional first year depreciation
deduction because construction of the new
plant began after September 10, 2001, and
before May 6, 2003. Accordingly, the
unadjusted depreciable basis of the new
plant that is eligible for the 30-percent
additional first year depreciation deduction
must not include the unadjusted depreciable
basis of the new turbine.
Example 7. Same facts as Example 6 except
that M entered into the written binding
contract to acquire the new turbine on
September 30, 2002, and construction of the
new plant commenced on August 1, 2001.
Because M began construction of the new
plant prior to September 11, 2001, pursuant
to paragraphs (b)(4)(iii)(A) and (C) of this
section, neither the new plant constructed for
M nor the turbine will qualify for the
additional first year depreciation deduction
because self-construction of the new plant
began prior to September 11, 2001.
Example 8. On September 1, 2001, N began
constructing property for its own use. On
October 1, 2001, N sold its rights to the
property to O, a related party under section
267(b). Pursuant to paragraph (b)(4)(iv) of
this section, the property is not eligible for
the additional first year depreciation
deduction because N and O are related
parties and construction of the property by N
began prior to September 11, 2001.
Example 9. On September 1, 2001, P
entered into a written binding contract to
acquire property. On October 1, 2001, P sold
its rights to the property to Q, a related party
under section 267(b). Pursuant to paragraph
(b)(4)(iv) of this section, the property is not
eligible for the additional first year
depreciation deduction because P and Q are
related parties and a written binding contract
for the acquisition of the property was in
effect prior to September 11, 2001.
Example 10. Prior to September 11, 2001,
R began constructing an electric generation
power plant for its own use. On May 1, 2003,
prior to the completion of the power plant,
R transferred the rights to own and use this
power plant to S, an unrelated party, for
$6,000,000. Between May 6, 2003, and June
30, 2003, S, a calendar-year taxpayer,
incurred another $1,200,000 to complete the
construction of the power plant and, on
August 1, 2003, S placed the power plant in
service. Because R and S are not related
parties, the transaction between R and S will
not be a disqualified transaction pursuant to
paragraph (b)(4)(iv) of this section.
Accordingly, S’s total expenditures of
$7,200,000 for the power plant qualify for the
additional first year depreciation deduction.
S’s additional first year depreciation
deduction for the power plant will be
$2,400,000, computed as $6,000,000
multiplied by 30 percent, plus $1,200,000
multiplied by 50 percent. The $6,000,000
portion of the total $7,200,000 unadjusted
depreciable basis qualifies for the 30-percent
additional first year depreciation deduction
because that portion of the total unadjusted
depreciable basis was acquired by S after
September 10, 2001, and before May 6, 2003.
However, because S began construction to
complete the power plant after May 5, 2003,
the $1,200,000 portion of the total $7,200,000

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unadjusted depreciable basis qualifies for the
50-percent additional first year depreciation
deduction.
Example 11. On September 1, 2001, T
acquired and placed in service equipment.
On October 15, 2001, T sells the equipment
to U, an unrelated party, and leases the
property back from U in a sale-leaseback
transaction. Pursuant to paragraph (b)(4)(iv)
of this section, the equipment does not
qualify for the additional first year
depreciation deduction because T, the user of
the equipment, acquired the equipment prior
to September 11, 2001.

(5) Placed-in-service date—(i) In
general. Depreciable property will meet
the requirements of this paragraph (b)(5)
if the property is placed in service by
the taxpayer before January 1, 2005, or,
in the case of property described in
section 168(k)(2)(B), is placed in service
by the taxpayer before January 1, 2006.
(ii) Sale-leaseback and syndication
transactions—(A) Sale-leaseback
transaction. If qualified property is
originally placed in service after
September 10, 2001, or 50-percent
bonus depreciation property is
originally placed in service after May 5,
2003, by a person and sold to a taxpayer
and leased back to the person by the
taxpayer within three months after the
date the property was originally placed
in service by the person, the property is
treated as originally placed in service by
the taxpayer-lessor not earlier than the
date on which the property is used by
the lessee under the leaseback.
(B) Syndication transaction. If
qualified property is originally placed in
service after September 10, 2001, or 50percent bonus depreciation property is
originally placed in service after May 5,
2003, by a lessor (including by
operation of paragraph (b)(5)(ii)(A) of
this section) and 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, and the user of the property after
the last sale during this three-month
period remains the same as when the
property was originally placed in
service by the lessor, the property is
treated as originally 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.
(C) Sale-leaseback transaction
followed by a syndication transaction. If
a sale-leaseback transaction that satisfies
the requirements in paragraph
(b)(5)(ii)(A) of this section is followed
by a syndication transaction that
satisfies the requirements in paragraph
(b)(5)(ii)(B) of this section, the placedin-service date of the property is
determined in accordance with
paragraph (b)(5)(ii)(B) of this section.

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(iii) Technical termination of a
partnership. For purposes of this
paragraph (b)(5), in the case of a
technical termination of a partnership
under section 708(b)(1)(B), qualified
property or 50-percent bonus
depreciation property placed in service
by the terminated partnership during
the taxable year of termination is treated
as originally placed in service by the
new partnership on the date the
qualified property or the 50-percent
bonus depreciation property is
contributed by the terminated
partnership to the new partnership.
(iv) Section 168(i)(7) transactions. For
purposes of this paragraph (b)(5), if
qualified property or 50-percent bonus
depreciation property is transferred in a
transaction described in section
168(i)(7) in the same taxable year that
the qualified property or the 50-percent
bonus depreciation property is placed in
service by the transferor, the transferred
property is treated as originally placed
in service on the date the transferor
placed in service the qualified property
or the 50-percent bonus depreciation
property, as applicable. In the case of
multiple transfers of qualified property
or 50-percent bonus depreciation
property in multiple transactions
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 or the 50-percent bonus
depreciation property, as applicable.
(c) Qualified leasehold improvement
property—(1) In general. For purposes
of section 168(k), qualified leasehold
improvement property means any
improvement, which is section 1250
property, to an interior portion of a
building that is nonresidential real
property if—
(i) The improvement is made under or
pursuant to a lease by the lessee (or any
sublessee) of the interior portion, or by
the lessor of that interior portion;
(ii) The interior portion of the
building is to be occupied exclusively
by the lessee (or any sublessee) of that
interior portion; and
(iii) The improvement is placed in
service more than 3 years after the date
the building was first placed in service
by any person.
(2) Certain improvements not
included. Qualified leasehold
improvement property does not include
any improvement for which the
expenditure is attributable to:
(i) The enlargement of the building;
(ii) Any elevator or escalator;
(iii) Any structural component
benefiting a common area; or

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(iv) The internal structural framework
of the building.
(3) Definitions. For purposes of this
paragraph (c), the following definitions
apply:
(i) Building has the same meaning as
that term is defined in § 1.48–1(e)(1).
(ii) Common area means any portion
of a building that is equally available to
all users of the building on the same
basis for uses that are incidental to the
primary use of the building. For
example, stairways, hallways, lobbies,
common seating areas, interior and
exterior pedestrian walkways and
pedestrian bridges, loading docks and
areas, and rest rooms generally are
treated as common areas if they are used
by different lessees of a building.
(iii) Elevator and escalator have the
same meanings as those terms are
defined in § 1.48–1(m)(2).
(iv) Enlargement has the same
meaning as that term is defined in
§ 1.48–12(c)(10).
(v) Internal structural framework has
the same meaning as that term is
defined in § 1.48–12(b)(3)(i)(D)(iii).
(vi) Lease has the same meaning as
that term is defined in section 168(h)(7).
In addition, a commitment to enter into
a lease is treated as a lease, and the
parties to the commitment are treated as
lessor and lessee. However, a lease
between related persons is not
considered a lease. For purposes of the
preceding sentence, related persons
are—
(A) Members of an affiliated group (as
defined in section 1504 and the
regulations thereunder); and
(B) Persons having a relationship
described in section 267(b) and the
regulations thereunder. For purposes of
applying section 267(b), the language
‘‘80 percent or more’’ is used instead of
‘‘more than 50 percent.’’
(vii) Nonresidential real property has
the same meaning as that term is
defined in section 168(e)(2)(B).
(viii) Structural component has the
same meaning as that term is defined in
§ 1.48–1(e)(2).
(d) Computation of depreciation
deduction for qualified property or 50percent bonus depreciation property—
(1) Additional first year depreciation
deduction—(i) In general. Except as
provided in paragraph (f)(5) of this
section, the allowable additional first
year depreciation deduction for
qualified property is determined by
multiplying the unadjusted depreciable
basis (as defined in § 1.168(k)–
1T(a)(2)(iii)) of the qualified property by
30 percent. Except as provided in
paragraph (f)(5) of this section, the
allowable additional first year
depreciation deduction for 50-percent

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bonus depreciation property is
determined by multiplying the
unadjusted depreciable basis (as defined
in § 1.168(k)–1T(a)(2)(iii)) of the 50percent bonus depreciation property by
50 percent. Except as provided in
paragraph (f)(1) of this section, the 30percent or 50-percent additional first
year depreciation deduction is not
affected by a taxable year of less than 12
months. See paragraph (f)(1) of this
section for qualified property or 50percent bonus depreciation property
placed in service and disposed of in the
same taxable year. See paragraph (f)(5)
of this section for qualified property or
50-percent bonus depreciation property
acquired in a like-kind exchange or as
a result of an involuntary conversion.
(ii) Property having a longer
production period. For purposes of
paragraph (d)(1)(i) of this section, the
unadjusted depreciable basis (as defined
in § 1.168(k)–1T(a)(2)(iii)) of qualified
property or 50-percent bonus
depreciation property described in
section 168(k)(2)(B) is limited to the
property’s unadjusted depreciable basis
attributable to the property’s
manufacture, construction, or
production after September 10, 2001 (for
qualified property), or May 5, 2003 (for
50-percent bonus depreciation
property), and before January 1, 2005.
(iii) Alternative minimum tax. The 30percent or 50-percent additional first
year depreciation deduction is allowed
for alternative minimum tax purposes
for the taxable year in which the
qualified property or the 50-percent
bonus depreciation property is placed in
service by the taxpayer. The 30-percent
or 50-percent additional first year
depreciation deduction for alternative
minimum tax purposes is based on the
unadjusted depreciable basis of the
property for alternative minimum tax
purposes.
(2) Otherwise allowable depreciation
deduction. (i) In general. Before
determining the amount otherwise
allowable as a depreciation deduction
for the qualified property or the 50percent bonus depreciation property for
the placed-in-service year and any
subsequent taxable year, the taxpayer
must determine the remaining adjusted
depreciable basis of the qualified
property or the 50-percent bonus
depreciation property. This remaining
adjusted depreciable basis is equal to
the unadjusted depreciable basis of the
qualified property or the 50-percent
bonus depreciation property reduced by
the amount of the additional first year
depreciation allowed or allowable,
whichever is greater. The remaining
adjusted depreciable basis of the
qualified property or the 50-percent

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52997

bonus depreciation property is then
depreciated using the applicable
depreciation provisions under the
Internal Revenue Code for the qualified
property or the 50-percent bonus
depreciation property. The remaining
adjusted depreciable basis of the
qualified property or the 50-percent
bonus depreciation property that is
MACRS property is also the basis to
which the annual depreciation rates in
the optional depreciation tables apply
(for further guidance, 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 deduction allowable
for the remaining adjusted depreciable
basis of the qualified property or the 50percent bonus depreciation property is
affected by a taxable year of less than 12
months.
(ii) Alternative minimum tax. For
alternative minimum tax purposes, the
depreciation deduction allowable for
the remaining adjusted depreciable
basis of the qualified property or the 50percent bonus depreciation property is
based on the remaining adjusted
depreciable basis for alternative
minimum tax purposes. The remaining
adjusted depreciable basis of the
qualified property or the 50-percent
bonus depreciable property for
alternative minimum tax purposes is
depreciated using the same depreciation
method, recovery period (or useful life
in the case of computer software), and
convention that apply to the qualified
property or the 50-percent bonus
depreciation property for regular tax
purposes.
(3) Examples. This paragraph (d) is
illustrated by the following examples:
Example 1. On March 1, 2003, V, a
calendar-year taxpayer, purchased and
placed in service qualified property that costs
$1 million and is 5-year property under
section 168(e). V depreciates its 5-year
property placed in service in 2003 using the
optional depreciation table that corresponds
with the general depreciation system, the
200-percent declining balance method, a 5year recovery period, and the half-year
convention. For 2003, V is allowed a 30percent additional first year depreciation
deduction of $300,000 (the unadjusted
depreciable basis of $1 million multiplied by
.30). Next, V must reduce the unadjusted
depreciable basis of $1 million by the
additional first year depreciation deduction
of $300,000 to determine the remaining
adjusted depreciable basis of $700,000. Then,
V’s depreciation deduction allowable in 2003
for the remaining adjusted depreciable basis
of $700,000 is $140,000 (the remaining
adjusted depreciable basis of $700,000
multiplied by the annual depreciation rate of
.20 for recovery year 1).

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Example 2. On June 1, 2003, W, a
calendar-year taxpayer, purchased and
placed in service 50-percent bonus
depreciation property that costs $126,000.
The property qualifies for the expensing
election under section 179 and is 5-year
property under section 168(e). W did not
purchase any other section 179 property in
2003. W makes the election under section
179 for the property and depreciates its 5year property placed in service in 2003 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. For 2003, W is first
allowed a $100,000 deduction under section
179. Next, W must reduce the cost of
$126,000 by the section 179 deduction of
$100,000 to determine the unadjusted
depreciable basis of $26,000. Then, for 2003,
W is allowed a 50-percent additional first
year depreciation deduction of $13,000 (the
unadjusted depreciable basis of $26,000
multiplied by .50). Next, W must reduce the
unadjusted depreciable basis of $26,000 by
the additional first year depreciation
deduction of $13,000 to determine the
remaining adjusted depreciable basis of
$13,000. Then, W’s depreciation deduction
allowable in 2003 for the remaining adjusted
depreciable basis of $13,000 is $2,600 (the
remaining adjusted depreciable basis of
$13,000 multiplied by the annual
depreciation rate of .20 for recovery year 1).

(e) Election not to deduct additional
first year depreciation—(1) In general. If
a taxpayer makes an election under this
paragraph (e), the election applies to all
qualified property or 50-percent bonus
depreciation property, as applicable,
that is in the same class of property and
placed in service in the same taxable
year. The rules of this paragraph (e)
apply to the following elections
provided under section 168(k):
(i) Qualified property. A taxpayer may
make an election not to deduct the 30percent 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, no additional first year
depreciation deduction is allowable for
the property placed in service during
the taxable year in the class of property.
(ii) 50-percent bonus depreciation
property. For any class of property that
is 50-percent bonus depreciation
property placed in service during the
taxable year, a taxpayer may make an
election—
(A) To deduct the 30-percent, instead
of the 50-percent, additional first year
depreciation. If this election is made,
the allowable additional first year
depreciation deduction is determined as
though the class of property is qualified
property under section 168(k)(2); or
(B) Not to deduct any additional first
year depreciation. If this election is
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depreciation deduction is allowable for
the class of property.
(2) Definition of class of property. For
purposes of this paragraph (e), the term
class of property means:
(i) Except for the property described
in paragraphs (e)(2)(ii) and (iv) of this
section, each class of property described
in section 168(e) (for example, 5-year
property);
(ii) Water utility property as defined
in section 168(e)(5) and depreciated
under section 168;
(iii) Computer software as defined in,
and depreciated under, section 167(f)(1)
and the regulations thereunder; or
(iv) Qualified leasehold improvement
property as defined in paragraph (c) of
this section and depreciated under
section 168.
(3) Time and manner for making
election—(i) Time for making election.
Except as provided in paragraph (e)(4)
of this section, any election specified in
paragraph (e)(1) 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 or the 50-percent bonus
depreciation property, as applicable, is
placed in service by the taxpayer.
(ii) Manner of making election. Except
as provided in paragraph (e)(4) of this
section, any election specified in
paragraph (e)(1) 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 or 50-percent bonus
depreciation property (for example, for
each member of a consolidated group by
the common parent of the group, by the
partnership, 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.
(4) Special rules for 2000 or 2001
returns. For the election specified in
paragraph (e)(1)(i) of this section for
qualified property placed in service by
the taxpayer during the taxable year that
included September 11, 2001, the
taxpayer should refer to the guidance
provided by the Internal Revenue
Service for the time and manner of
making this election on the 2000 or
2001 Federal tax return for the taxable
year that included September 11, 2001
(for further guidance, see sections
3.03(3) and 4 of Rev. Proc. 2002–33
(2002–1 C.B. 963), Rev. Proc. 2003–50
(2003–29 I.R.B. 119), and
§ 601.601(d)(2)(ii)(b) of this chapter).
(5) Failure to make election. If a
taxpayer does not make the applicable
election specified in paragraph (e)(1) of
this section within the time and in the

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manner prescribed in paragraph (e)(3) or
(4) of this section, the amount of
depreciation allowable for that property
under section 167(f)(1) or under section
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
depreciation deduction. Thus, any
election specified in paragraph (e)(1) 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).
(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 or 50-percent
bonus depreciation property placed in
service and disposed of during the same
taxable year.
(ii) Technical termination of a
partnership. In the case of a technical
termination of a partnership under
section 708(b)(1)(B), the additional first
year depreciation deduction is
allowable for any qualified property or
50-percent bonus depreciation property
placed in service by the terminated
partnership during the taxable year of
termination and contributed by the
terminated partnership to the new
partnership. The allowable additional
first year depreciation deduction for the
qualified property or the 50-percent
bonus depreciation property shall not be
claimed by the terminated partnership
but instead shall be claimed by the new
partnership for the new partnership’s
taxable year in which the qualified
property or the 50-percent bonus
depreciation property was contributed
by the terminated partnership to the
new partnership. However, if qualified
property or 50-percent bonus
depreciation property is both placed in
service 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
termination, 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 or 50-percent
bonus depreciation property is
transferred in a transaction described in
section 168(i)(7) in the same taxable
year that the qualified property or the

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50-percent bonus depreciation property
is placed in service by the transferor, the
additional first year depreciation
deduction is allowable for the qualified
property or the 50-percent bonus
depreciation property. The allowable
additional first year depreciation
deduction for the qualified property or
the 50-percent bonus depreciation
property for the transferor’s taxable year
in which the property is placed in
service is allocated between the
transferor and the transferee on a
monthly basis. This allocation shall be
made in accordance with the rules in
§ 1.168(d)–1(b)(7)(ii) for allocating the
depreciation deduction between the
transferor and the transferee. However,
if qualified property or 50-percent
bonus depreciation property is both
placed in service and transferred in a
transaction described in section
168(i)(7) by the transferor during the
same taxable year, and if such property
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 either party.
(iv) Examples. The application of this
paragraph (f)(1) is illustrated by the
following examples:
Example 1. X and Y are equal partners in
Partnership XY, a general partnership. On
February 1, 2002, Partnership XY purchased
and placed in service new equipment at a
cost of $30,000. On March 1, 2002, X sells
its entire 50 percent interest to Z in a transfer
that terminates the partnership under section
708(b)(1)(B). As a result, terminated
Partnership XY is deemed to have
contributed the equipment to new
Partnership XY. Pursuant to paragraph
(f)(1)(ii) of this section, new Partnership XY,
not terminated Partnership XY, is eligible to
claim the 30-percent additional first year
depreciation deduction allowable for the
equipment for the taxable year 2002
(assuming all other requirements are met).
Example 2. On January 5, 2002, BB
purchased and placed in service new office
desks for a total amount of $8,000. On August
20, 2002, BB transferred the office desks to
Partnership BC in a transaction described in
section 721. BB and Partnership BC are
calendar-year taxpayers. Because the
transaction between BB and Partnership BC
is a transaction described in section 168(i)(7),
pursuant to paragraph (f)(1)(iii) of this
section the 30-percent additional first year
depreciation deduction allowable for the
desks is allocated between BB and
Partnership BC in accordance with the rules
in § 1.168(d)–1(b)(7)(ii) for allocating the
depreciation deduction between the
transferor and the transferee. Accordingly,
the 30-percent additional first year
depreciation deduction allowable for the
desks for 2002 of $2,400 (the unadjusted
depreciable basis of $8,000 multiplied by .30)

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is allocated between BB and Partnership BC
based on the number of months that BB and
Partnership BC held the desks in service.
Thus, because the desks were held in service
by BB for 7 of 12 months, which includes the
month in which BB placed the desks in
service but does not include the month in
which the desks were transferred, BB is
allocated $1,400 (7⁄12× $2,400 additional first
year depreciation deduction). Partnership BC
is allocated $1,000, the remaining 5⁄12 of the
$2,400 additional first year depreciation
deduction allowable for the desks.

(2) Redetermination of basis. If the
unadjusted depreciable basis (as defined
in § 1.168(k)–1T(a)(2)(iii)) of qualified
property or 50-percent bonus
depreciation property is redetermined
(for example, due to contingent
purchase price or discharge of
indebtedness) by January 1, 2005 (or
January 1, 2006, for property described
in section 168(k)(2)(B)), the additional
first year depreciation deduction
allowable for the qualified property or
the 50-percent bonus depreciation
property is redetermined as follows:
(i) Increase in basis. For the taxable
year in which an increase in basis of
qualified property or 50-percent bonus
depreciation property occurs, the
taxpayer shall claim an additional first
year depreciation deduction for
qualified property by multiplying the
amount of the increase in basis for this
property by 30 percent or, for 50-percent
bonus depreciation property, by
multiplying the amount of the increase
in basis for this property by 50 percent.
For purposes of this paragraph (f)(2)(i),
the 30-percent additional first year
depreciation deduction applies to the
increase in basis if the underlying
property is qualified property and the
50-percent additional first year
depreciation deduction applies to the
increase in basis if the underlying
property is 50-percent bonus
depreciation property. To determine the
amount otherwise allowable as a
depreciation deduction for the increase
in basis of qualified property or 50percent bonus depreciation property,
the amount of the increase in basis of
the qualified property or the 50-percent
bonus depreciation property must be
reduced by the additional first year
depreciation deduction allowed or
allowable, whichever is greater, for the
increase in basis and the remaining
increase in basis of—
(A) Qualified property or 50-percent
bonus depreciation property (except for
computer software described in
paragraph (b)(2)(i)(B) of this section) is
depreciated over the recovery period of
the qualified property or the 50-percent
bonus depreciation property, as
applicable, remaining as of the
beginning of the taxable year in which

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the increase in basis occurs, and using
the same depreciation method and
convention applicable to the qualified
property or 50-percent bonus
depreciation property, as applicable,
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 or 50-percent
bonus depreciation property is
depreciated ratably 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 increase in basis occurs.
(ii) Decrease in basis. For the taxable
year in which a decrease in basis of
qualified property or 50-percent bonus
depreciation property occurs, the
taxpayer shall include in the taxpayer’s
income the excess additional first year
depreciation deduction previously
claimed for the qualified property or the
50-percent bonus depreciation property.
This excess additional first year
depreciation deduction for qualified
property is determined by multiplying
the amount of the decrease in basis for
this property by 30 percent. The excess
additional first year depreciation
deduction for 50-percent bonus
depreciation property is determined by
multiplying the amount of the decrease
in basis for this property by 50 percent.
For purposes of this paragraph (f)(2)(ii),
the 30-percent additional first year
depreciation deduction applies to the
decrease in basis if the underlying
property is qualified property and the
50-percent additional first year
depreciation deduction applies to the
decrease in basis if the underlying
property is 50-percent bonus
depreciation property. Also, if the
taxpayer establishes by adequate records
or other sufficient evidence that the
taxpayer claimed less than the
additional first year depreciation
deduction allowable for the qualified
property or the 50-percent bonus
depreciation property before the
decrease in basis or if the taxpayer
claimed more than the additional first
year depreciation deduction allowable
for the qualified property or the 50percent bonus depreciation 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
deduction percentage actually claimed
by the taxpayer for the qualified
property or the 50-percent bonus
depreciation property, as applicable,
before the decrease in basis. To
determine the amount includible in the
taxpayer’s income for the excess

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depreciation previously claimed (other
than the additional first year
depreciation deduction) resulting from
the decrease in basis of the qualified
property or the 50-percent bonus
depreciation property, the amount of the
decrease in basis of the qualified
property or the 50-percent bonus
depreciation property must be adjusted
by the excess additional first year
depreciation deduction includible in the
taxpayer’s income (as determined under
this paragraph) and the remaining
decrease in basis of—
(A) Qualified property or 50-percent
bonus depreciation property (except for
computer software described in
paragraph (b)(2)(i)(B) of this section) is
included in the taxpayer’s income over
the recovery period of the qualified
property or the 50-percent bonus
depreciation property, as applicable,
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 or 50-percent
bonus depreciation property, as
applicable, that applies in the taxable
year in which the decrease in basis
occurs; and
(B) Computer software (as defined in
paragraph (b)(2)(i)(B) of this section)
that is qualified property or 50-percent
bonus depreciation property is included
in the taxpayer’s income ratably 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.
(iii) Definition. For purposes of this
paragraph (f)(2)—
(A) An increase in basis occurs in the
taxable year an amount is taken into
account 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
following examples:
Example 1. (i) On May 15, 2002, CC, 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, CC agrees to pay the seller 25
percent of the gross profits from the
operation of the property in 2002. On May
15, 2003, CC paid to the seller an additional
$10,000. CC depreciates the 5-year property
placed in service in 2002 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.
(ii) For 2002, CC is allowed a 30-percent
additional first year depreciation deduction
of $60,000 (the unadjusted depreciable basis
of $200,000 multiplied by .30). In addition,

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CC’s depreciation deduction for 2002 for the
remaining adjusted depreciable basis of
$140,000 (the unadjusted depreciable basis of
$200,000 reduced by the additional first year
depreciation deduction of $60,000) is
$28,000 (the remaining adjusted depreciable
basis of $140,000 multiplied by the annual
depreciation rate of .20 for recovery year 1).
(iii) For 2003, CC’s depreciation deduction
for the remaining adjusted depreciable basis
of $140,000 is $44,800 (the remaining
adjusted depreciable basis of $140,000
multiplied by the annual depreciation rate of
.32 for recovery year 2). In addition, pursuant
to paragraph (f)(2)(i) of this section, CC is
allowed an additional first year depreciation
deduction for 2003 for the $10,000 increase
in basis of the qualified property.
Consequently, CC is allowed an additional
first year depreciation deduction of $3,000
(the increase in basis of $10,000 multiplied
by .30). Also, CC is allowed a depreciation
deduction for 2003 attributable to the
remaining increase in basis of $7,000 (the
increase in basis of $10,000 reduced by the
additional first year depreciation deduction
of $3,000). The depreciation deduction
allowable for 2003 attributable to the
remaining increase in basis of $7,000 is
$3,111 (the remaining increase in basis of
$7,000 multiplied by .4444, which is equal to
1/remaining recovery period of 4.5 years at
January 1, 2003, multiplied by 2).
Accordingly, for 2003, CC’s total depreciation
deduction allowable for the qualified
property is $50,911.
Example 2. (i) On May 15, 2002, CC
purchased and placed in service qualified
property that is 5-year property at a cost of
$400,000. To purchase the property, DD
borrowed $250,000 from Bank2. On May 15,
2003, Bank2 forgives $50,000 of the
indebtedness. DD 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. DD depreciates the 5-year property
placed in service in 2002 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.
(ii) For 2002, DD is allowed a 30-percent
additional first year depreciation deduction
of $120,000 (the unadjusted depreciable basis
of $400,000 multiplied by .30). In addition,
DD’s depreciation deduction allowable for
2002 for the remaining adjusted depreciable
basis of $280,000 (the unadjusted depreciable
basis of $400,000 reduced by the additional
first year depreciation deduction of $120,000)
is $56,000 (the remaining adjusted
depreciable basis of $280,000 multiplied by
the annual depreciation rate of .20 for
recovery year 1).
(iii) For 2003, DD’s deduction for the
remaining adjusted depreciable basis of
$280,000 is $89,600 (the remaining adjusted
depreciable basis of $280,000 multiplied by
the annual depreciation rate of .32 for
recovery year 2). However, pursuant to
paragraph (f)(2)(ii) of this section, DD must
include in its taxable income for 2003 the
excess depreciation previously claimed for
the $50,000 decrease in basis of the qualified
property. Consequently, DD must include in

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its taxable income for 2003 the excess
additional first year depreciation of $4,500
(the decrease in basis of $50,000 multiplied
by .30). Also, DD must include in its taxable
income for 2003 the excess depreciation
attributable to the remaining decrease in
basis of $45,500 (the decrease in basis of
$50,000 reduced by the excess additional
first year depreciation of $4,500). The
amount includible in taxable income for 2003
for the remaining decrease in basis of $45,500
is $20,222 (the remaining decrease in basis of
$45,500 multiplied by .4444, which is equal
to 1/remaining recovery period of 4.5 years
at January 1, 2003, multiplied by 2).
Accordingly, for 2003, DD’s total
depreciation deduction allowable for the
qualified property is $64,878 ($89,600 minus
$4,500 minus $20,222).

(3) Section 1245 and 1250
depreciation recapture. For purposes of
section 1245 and the regulations
thereunder, the additional first year
depreciation deduction is an amount
allowed or allowable for depreciation.
Further, for purposes of section 1250(b)
and the regulations thereunder, the
additional first year depreciation
deduction is not a straight line method.
(4) Coordination with section 169. The
additional first year depreciation
deduction is allowable in the placed-inservice year of a certified pollution
control facility (as defined in § 1.169–
2(a)) that is qualified property or 50percent bonus depreciation property,
even if the taxpayer makes the election
to amortize the certified pollution
control facility under section 169 and
the regulations thereunder in the
certified pollution control facility’s
placed-in-service year.
(5) Like-kind exchanges and
involuntary conversions—(i) Scope. The
rules of this paragraph (f)(5) apply to
acquired MACRS property or acquired
computer software that is eligible for the
additional first year depreciation
deduction under section 168(k) at the
time of replacement provided the time
of replacement is after September 10,
2001, and before January 1, 2005, or, in
the case of acquired MACRS property or
acquired computer software that is
qualified property, or 50-percent bonus
depreciation property, described in
section 168(k)(2)(B), the time of
replacement is after September 10, 2001,
and before January 1, 2006.
(ii) Definitions. For purposes of this
paragraph (f)(5), the following
definitions apply:
(A) Acquired MACRS property is
MACRS property in the hands of the
acquiring taxpayer that is acquired in a
transaction described in section 1031(a),
(b), or (c) for other MACRS property or
that is acquired in connection with an
involuntary conversion of other MACRS

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Federal Register / Vol. 68, No. 173 / Monday, September 8, 2003 / Rules and Regulations
property in a transaction to which
section 1033 applies.
(B) Exchanged or involuntarily
converted MACRS property is MACRS
property that is transferred by the
taxpayer in a transaction described in
section 1031(a), (b), or (c), or that is
converted as a result of an involuntary
conversion to which section 1033
applies.
(C) Acquired computer software is
computer software (as defined in
paragraph (b)(2)(i)(B) of this section) in
the hands of the acquiring taxpayer that
is acquired in a like-kind exchange
under section 1031 or as a result of an
involuntary conversion under section
1033.
(D) Exchanged or involuntarily
converted computer software is
computer software (as defined in
paragraph (b)(2)(i)(B) of this section)
that is transferred by the taxpayer in a
like-kind exchange under section 1031
or that is converted as a result of an
involuntary conversion under section
1033.
(E) Time of disposition is when the
disposition of the exchanged or
involuntarily converted MACRS
property or the exchanged or
involuntarily converted computer
software, as applicable, takes place.
(F) Time of replacement is the later of:
(1) When the property received in the
exchange or involuntary conversion is
placed in service; or
(2) The time of disposition of
involuntarily converted property.
(G) Carryover basis is the lesser of:
(1) The basis in the acquired MACRS
property or acquired computer software,
as applicable and as determined under
section 1031(d) or 1033(b) and the
regulations thereunder; or
(2) The adjusted depreciable basis of
the exchanged or involuntarily
converted MACRS property or the
exchanged or involuntarily converted
computer software, as applicable.
(H) Excess basis is any excess of the
basis in the acquired MACRS property
or acquired computer software, as
applicable and as determined under
section 1031(d) or 1033(b) and the
regulations thereunder, over the
carryover basis as determined under
paragraph (f)(5)(ii)(G) of this section.
(I) Remaining carryover basis is the
carryover basis as determined under
paragraph (f)(5)(ii)(G) of this section
reduced by—
(1) The percentage of the taxpayer’s
use of property for the taxable year other
than in the taxpayer’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 thereunder (including

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section 1016(a)(2) and (3)) for periods
prior to the disposition of the exchanged
or involuntarily converted property.
(J) Remaining excess basis is the
excess basis as determined under
paragraph (f)(5)(ii)(H) of this section
reduced by—
(1) The percentage of the taxpayer’s
use of property for the taxable year other
than in the taxpayer’s trade or business
(or for the production of income);
(2) Any portion of the basis the
taxpayer properly elects to treat as an
expense under section 179; and
(3) Any adjustments to basis provided
by other provisions of the Code and the
regulations thereunder.
(iii) Computation—(A) In general.
Assuming all other requirements are
met, the remaining carryover basis for
the year of replacement and the
remaining excess basis, if any, for the
year of replacement for the acquired
MACRS property or the acquired
computer software, as applicable, are
eligible for the additional first year
depreciation deduction. The 30-percent
additional first year depreciation
deduction applies to the remaining
carryover basis and the remaining
excess basis, if any, of the acquired
MACRS property or the acquired
computer software if the time of
replacement is after September 10, 2001,
and before May 6, 2003, or if the
taxpayer made the election provided in
paragraph (e)(1)(ii)(A) of this section.
The 50-percent additional first year
depreciation deduction applies to the
remaining carryover basis and the
remaining excess basis, if any, of the
acquired MACRS property or the
acquired computer software if the time
of replacement is after May 5, 2003, and
before January 1, 2005, or before January
1, 2006, for 50-percent bonus
depreciation property described in
section 168(k)(2)(B). The additional first
year depreciation deduction is
computed separately for the remaining
carryover basis and the remaining
excess basis. Rules similar to the rules
provided in paragraph (d) of this section
apply to property described in section
168(k)(2)(B) and for alternative
minimum tax purposes.
(B) Year of disposition and year of
replacement. The additional first year
depreciation deduction is allowable for
the acquired MACRS property or
acquired computer software in the year
of replacement. However, the additional
first year depreciation deduction is not
allowable for the exchanged or
involuntarily converted MACRS
property or the exchanged or
involuntarily converted computer
software if the MACRS property or
computer software, as applicable, is

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placed in service and disposed of in an
exchange or involuntary conversion in
the same taxable year.
(iv) Sale-leaseback transaction. For
purposes of this paragraph (f)(5), if
MACRS property or computer software
is sold to a taxpayer and leased back to
a person by the taxpayer within three
months after the time of disposition of
the MACRS property or computer
software, as applicable, the time of
replacement for this MACRS property or
computer software, as applicable, shall
not be earlier than the date on which the
MACRS property or computer software,
as applicable, is used by the lessee
under the leaseback.
(v) Examples. The application of this
paragraph (f)(5) is illustrated by the
following examples:
Example 1. (i) In December 2002, EE, 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)(1) and is 5year property under section 168(e). EE
depreciated Canopy V1 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. EE
elected to use the optional depreciation
tables to compute the depreciation allowance
for Canopy V1. On January 1, 2003, Canopy
V1 was destroyed in a fire and was no longer
usable in EE’s business. On June 1, 2003, in
a transaction described in section 1033(a)(2),
EE acquired and placed in service Canopy
W1 with all of the $160,000 of insurance
proceeds EE received due to the loss of
Canopy V1. Canopy W1 is 50-percent bonus
depreciation property under section 168(k)(4)
and is 5-year property under section 168(e).
(ii) For 2002, EE is allowed a 30-percent
additional first year depreciation deduction
of $60,000 for Canopy V1 (the unadjusted
depreciable basis of $200,000 multiplied by
.30), and a regular MACRS depreciation
deduction of $28,000 for Canopy V1 (the
remaining adjusted depreciable basis of
$140,000 multiplied by the annual
depreciation rate of .20 for recovery year 1).
(iii) Pursuant to paragraph (f)(5)(iii)(A) of
this section, the additional first year
depreciation deduction allowable for Canopy
W1 equals $56,000 (.50 of Canopy W1’s
remaining carryover basis of $112,000
(Canopy V1’s remaining adjusted depreciable
basis of $140,000 minus 2002 regular MACRS
depreciation deduction of $28,000).
Example 2. (i) Same facts as in Example 1,
except EE elected not to deduct the
additional first year depreciation for 5-year
property placed in service in 2002. EE
deducted the additional first year
depreciation for 5-year property placed in
service in 2003.
(ii) For 2002, EE is allowed a regular
MACRS depreciation deduction of $40,000
for Canopy V1 (the unadjusted depreciable
basis of $200,000 multiplied by the annual
depreciation rate of .20 for recovery year 1).
(iii) Pursuant to paragraph (f)(5)(iii)(A) of
this section, the additional first year

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depreciation deduction allowable for Canopy
W1 equals $80,000 (.50 of Canopy W1’s
remaining carryover basis of $160,000
(Canopy V1’s unadjusted depreciable basis of
$200,000 minus 2002 regular MACRS
depreciation deduction of $40,000).
Example 3. (i) In December 2001, FF, a
calendar year corporation, acquired for
$10,000 and placed in service Computer X2.
Computer X2 is qualified property under
section 168(k)(1) and is 5-year property
under section 168(e). FF depreciated
Computer X2 under the general depreciation
system of section 168(a) by using the 200percent declining balance method of
depreciation, a 5-year recovery period, and
the half-year convention. FF elected to use
the optional depreciation tables to compute
the depreciation allowance for Computer X2.
On January 1, 2002, FF acquired Computer
Y2 by exchanging Computer X2 and $1,000
cash in a transaction described in section
1031(a). Computer Y2 is qualified property
under section 168(k)(1) and is 5-year
property under section 168(e).
(ii) For 2001, FF is allowed a 30-percent
additional first year depreciation deduction
of $3,000 for Computer X2 (unadjusted basis
of $10,000 multiplied by .30), and a regular
MACRS depreciation deduction of $1,400 for
Computer X2 (the remaining adjusted
depreciable basis of $7,000 multiplied by the
annual depreciation rate of .20 for recovery
year 1).
(iii) Pursuant to paragraph (f)(5)(iii)(A) of
this section, the 30-percent additional first
year depreciation deduction for Computer Y2
is allowable for the remaining carryover basis
of $5,600 (Computer X2’s unadjusted
depreciable basis of $10,000 minus
additional first year depreciation deduction
allowable of $3,000 minus 2001 regular
MACRS depreciation deduction of $1,400)
and for the remaining excess basis of $1,000
(cash paid for Computer Y2). Thus, the 30percent additional first year depreciation
deduction for the remaining carryover basis
equals $1,680 ($5,600 multiplied by .30) and
for the remaining excess basis equals $300
($1,000 multiplied by .30), which totals
$1,980.
Example 4. (i) In September 2002, GG, a
June 30 year-end corporation, acquired for
$20,000 and placed in service Equipment X3.
Equipment X3 is qualified property under
section 168(k)(1) and is 5-year property
under section 168(e). GG depreciated
Equipment X3 under the general depreciation
system of section 168(a) by using the 200percent declining balance method of
depreciation, a 5-year recovery period, and
the half-year convention. GG elected to use
the optional depreciation tables to compute
the depreciation allowance for Equipment
X3. In December 2002, GG acquired
Equipment Y3 by exchanging Equipment X3
and $5,000 cash in a transaction described in
section 1031(a). Equipment Y3 is qualified
property under section 168(k)(1) and is 5year property under section 168(e).
(ii) Pursuant to paragraph (f)(5)(iii)(B) of
this section, no additional first year
depreciation deduction is allowable for
Equipment X3 and, pursuant to § 1.168(d)–
1T(b)(3)(ii), no regular depreciation
deduction is allowable for Equipment X3.

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(iii) Pursuant to paragraph (f)(5)(iii)(A) of
this section, the 30-percent additional first
year depreciation deduction for Equipment
Y3 is allowable for the remaining carryover
basis of $20,000 (Equipment X3’s unadjusted
depreciable basis of $20,000) and for the
remaining excess basis of $5,000 (cash paid
for Equipment Y3). Thus, the 30-percent
additional first year depreciation deduction
for the remaining carryover basis equals
$6,000 ($20,000 multiplied by .30) and for
the remaining excess basis equals $1,500
($5,000 multiplied by .30), which totals
$7,500.
Example 5. (i) Same facts as in Example 4.
GG depreciated Equipment Y3 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. GG
elected to use the optional depreciation
tables to compute the depreciation allowance
for Equipment Y3. On July 1, 2003, GG
acquired Equipment Z1 by exchanging
Equipment Y3 in a transaction described in
section 1031(a). Equipment Z1 is 50-percent
bonus depreciation property under section
168(k)(4) and is 5-year property under
section 168(e).
(ii) For the taxable year ending June 30,
2003, the regular MACRS depreciation
deduction allowable for the remaining
carryover basis of Equipment Y3 is $2,800
(the remaining carryover basis of $14,000
multiplied by the annual depreciation rate of
.20 for recovery year 1) and for the remaining
excess basis of Equipment Y3 is $700 (the
remaining excess basis of $3,500 multiplied
by the annual depreciation rate of .20 for
recovery year 1), which totals $3,500.
(iii) For the taxable year ending June 30,
2004, pursuant to paragraph (f)(5)(iii)(A) of
this section, the 50-percent additional first
year depreciation deduction allowable for
Equipment Z1 is $7,000 (.50 of Equipment
Z1’s remaining carryover basis of $14,000
(Equipment Y3’s total unadjusted depreciable
basis of $25,000 minus the total additional
first year depreciation deduction of $7,500
minus the total regular MACRS depreciation
deduction of $3,500).

(6) Change in use—(i) Change in use
of depreciable property. The
determination of whether the use of
depreciable property changes is made in
accordance with section 168(i)(5) and
regulations thereunder.
(ii) Conversion to personal use. If
qualified property or 50-percent bonus
depreciation property is converted from
business or income-producing use to
personal use in the same taxable year in
which the property is placed in service
by a taxpayer, the additional first year
depreciation deduction is not allowable
for the property.
(iii) Conversion to business or incomeproducing use—(A) During the same
taxable year. If, during the same taxable
year, property is acquired by a taxpayer
for personal use and is converted by the
taxpayer from personal use to business
or income-producing use, the additional

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first year depreciation deduction is
allowable for the property in the taxable
year the property is converted 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 taxable 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 property is
converted to business or incomeproducing use (assuming all of the
requirements 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 10, 2001 (for qualified
property), or after May 5, 2003 (for 50percent bonus depreciation property),
and converted by the taxpayer from
personal use to business or incomeproducing use by January 1, 2005. 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.
(iv) Depreciable property changes use
subsequent to the placed-in-service
year—(A) If the use of qualified property
or 50-percent bonus depreciation
property changes in the hands of the
same taxpayer subsequent to the taxable
year the qualified property or the 50percent bonus depreciation property, as
applicable, is placed in service and, as
a result of the change in use, the
property is no longer qualified property
or 50-percent bonus depreciation
property, as applicable, the additional
first year depreciation deduction
allowable for the qualified property or
the 50-percent bonus depreciation
property, as applicable, is not
redetermined.
(B) If depreciable property is not
qualified property or 50-percent bonus
depreciation property in the taxable
year the property is placed in service by
the taxpayer, the additional first year
depreciation deduction is not allowable
for the property even if a change in the
use of the property subsequent to the
taxable year the property is placed in
service results in the property being
qualified property or 50-percent bonus
depreciation property in the taxable
year of the change in use.

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(v) Examples. The application of this
paragraph (f)(6) is illustrated by the
following examples:
Example 1. (i) On January 1, 2002, HH, a
calendar year corporation, purchased and
placed in service several new computers at
a total cost of $100,000. HH used these
computers within the United States for 3
months in 2002 and then moved and used
the computers outside the United States for
the remainder of 2002. On January 1, 2003,
HH permanently returns the computers to the
United States for use in its business.
(ii) For 2002, the computers are considered
as used predominantly outside the United
States in 2002 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)(A)2) of this
section, the computers are not qualified
property in 2002, the placed-in-service year.
Thus, pursuant to (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
2003.
Example 2. (i) On February 8, 2002, II, 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 property under
section 168(k). II depreciates its 5-year
property placed in service in 2002 using the
optional depreciation table that corresponds
with the general depreciation system, the
200-percent declining balance method, a 5year recovery period, and the half-year
convention. On June 4, 2003, due to changes
in II’s business circumstances, II permanently
moves the equipment to its plant in Mexico.
(ii) For 2002, II is allowed a 30-percent
additional first year depreciation deduction
of $300,000 (the adjusted depreciable basis of
$1,000,000 multiplied by .30). In addition,
II’s depreciation deduction allowable in 2002
for the remaining adjusted depreciable basis
of $700,000 (the unadjusted depreciable basis
of $1,000,000 reduced by the additional first
year depreciation deduction of $300,000) is
$140,000 (the remaining adjusted depreciable
basis of $700,000 multiplied by the annual
depreciation rate of .20 for recovery year 1).
(iii) For 2003, the equipment is considered
as used predominantly outside the United
States pursuant to § 1.48–1(g)(1)(i). As a
result of this change in use, the adjusted
depreciable basis of $560,000 for the
equipment is required to be depreciated
under the alternative depreciation system of
section 168(g) beginning in 2003. However,
the additional first year depreciation
deduction of $300,000 allowed for the
equipment in 2002 is not redetermined.

(7) Earnings and profits. The
additional first year depreciation
deduction is not allowable for purposes
of computing earnings and profits.
(8) Limitation of amount of
depreciation for certain passenger
automobiles. For a passenger
automobile as defined in section

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280F(d)(5), the limitation under section
280F(a)(1)(A)(i) is increased by—
(i) $4,600 for qualified property
acquired by a taxpayer after September
10, 2001, and before May 6, 2003; and
(ii) $7,650 for qualified property or
50-percent bonus depreciation property
acquired by a taxpayer after May 5,
2003.
(9) Section 754 election. In general,
for purposes of section 168(k) any
increase in basis of qualified property or
50-percent bonus depreciation property
due to a section 754 election is not
eligible for the additional first year
depreciation deduction. However, if
qualified property or 50-percent bonus
depreciation property is placed in
service by a partnership in the taxable
year the partnership terminates under
section 708(b)(1)(B), any increase in
basis of the qualified property or the 50percent bonus depreciation property
due to a section 754 election is eligible
for the additional first year depreciation
deduction.
(g) Effective date—(1) In general.
Except as provided in paragraphs (g)(2)
and (3) of this section, this section
applies to qualified property under
section 168(k)(2) acquired by a taxpayer
after September 10, 2001, and to 50percent bonus depreciation property
under section 168(k)(4) acquired by a
taxpayer after May 5, 2003. This section
expires on September 8, 2006.
(2) Technical termination of a
partnership or section 168(i)(7)
transactions. If qualified property or 50
percent bonus depreciation property is
transferred in a technical termination of
a partnership under section 708(b)(1)(B)
or in a transaction described in section
168(i)(7) for a taxable year ending on or
before September 8, 2003, and the
additional first year depreciation
deduction allowable for the property
was not determined in accordance with
paragraph (f)(1)(ii) or (iii) of this section,
as applicable, the Internal Revenue
Service will allow any reasonable
method of determining the additional
first year depreciation deduction
allowable for the property in the year of
the transaction that is consistently
applied to the property by all parties to
the transaction.
(3) Like-kind exchanges and
involuntary conversions. If a taxpayer
did not claim on a federal tax return for
a taxable year ending on or before
September 8, 2003, the additional first
year depreciation deduction for the
remaining carryover basis of qualified
property or 50-percent bonus
depreciation property acquired in a
transaction described in section 1031(a),
(b), or (c), or in a transaction to which
section 1033 applies and the taxpayer

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did not make an election not to deduct
the additional first year depreciation
deduction for the class of property
applicable to the remaining carryover
basis, the Internal Revenue Service will
treat the taxpayer’s method of not
claiming the additional first year
depreciation deduction for the
remaining carryover basis as a
permissible method of accounting and
will treat the amount of the additional
first year depreciation deduction
allowable for the remaining carryover
basis as being equal to zero, provided
the taxpayer does not claim the
additional first year depreciation
deduction for the remaining carryover
basis in accordance with paragraph
(g)(4)(ii) of this section.
(4) Change in method of accounting—
(i) Special rules for 2000 or 2001
returns. If a taxpayer did not claim on
the Federal tax return for the taxable
year that included September 11, 2001,
any additional first year depreciation
deduction for a class of property that is
qualified property and did not make an
election not to deduct the additional
first year depreciation deduction for that
class of property, the taxpayer should
refer to the guidance provided by the
Internal Revenue Service for the time
and manner of claiming the additional
first year depreciation deduction for the
class of property (for further guidance,
see section 4 of Rev. Proc. 2002–33
(2002–1 C.B. 963), Rev. Proc. 2003–50
(2003–29 I.R.B. 119), and
§ 601.601(d)(2)(ii)(b) of this chapter).
(ii) Like-kind exchanges and
involuntary conversions. If a taxpayer
did not claim on a federal tax return for
any taxable year ending on or before
September 8, 2003, the additional first
year depreciation deduction allowable
for the remaining carryover basis of
qualified property or 50-percent bonus
depreciation property acquired in a
transaction described in section 1031(a),
(b), or (c), or in a transaction to which
section 1033 applies and the taxpayer
did not make an election not to deduct
the additional first year depreciation
deduction for the class of property
applicable to the remaining carryover
basis, the taxpayer may claim the
additional first year depreciation
deduction allowable for the remaining
carryover basis in accordance with
paragraph (f)(5) of this section either:
(A) By filing an amended return (or a
qualified amended return, if applicable
(for further guidance, see Rev. Proc. 94–
69 (1994–2 C.B. 804) and
§ 601.601(d)(2)(ii)(b) of this chapter)) on
or before December 31, 2003, for the
year of replacement and any affected
subsequent taxable year; or,

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(B) By following the applicable
administrative procedures issued under
§ 1.446–1(e)(3)(ii) for obtaining the
Commissioner’s automatic consent to a
change in method of accounting (for
further guidance, see Rev. Proc. 2002–9
(2002–1 C.B. 327) and
§ 601.601(d)(2)(ii)(b) of this chapter).
■ Par. 8. Section 1.169–3 is amended by:
■ 1. Revising paragraphs (a) and (b)(2).
■ 2. Adding paragraph (g).
The additions and revisions read as
follows:
§ 1.169–3

Amortizable basis.

(a) [Reserved]. For further guidance,
see § 1.169–3T(a).
*
*
*
*
*
(b) * * *
(2) [Reserved]. For further guidance,
see § 1.169–3T(b)(2).
*
*
*
*
*
(g) Effective date for qualified
property, 50-percent bonus depreciation
property, and qualified New York
Liberty Zone property. [Reserved]. For
further guidance, see § 1.169–3T(g).
■ Par. 9. Section 1.169–3T is added to
read as follows:
§ 1.169–3T

Amortizable basis (temporary).

(a) In general. The amortizable basis
of a certified pollution control facility
for the purpose of computing the
amortization deduction under section
169 is the adjusted basis of the facility
for purposes of determining gain (see
part II (section 1011 and following),
subchapter O, chapter 1 of the Internal
Revenue Code), in conjuction with
paragraphs (b), (c), and (d) of this
section. The adjusted basis for purposes
of determining gain (computed without
regard to paragraphs (b), (c), and (d) of
this section) of a facility that performs
a function in addition to pollution
control, or that is used in connection
with more than one plant or other
property, or both, is determined under
§ 1.169–2(a)(3). For rules as to additions
and improvements to such a facility, see
paragraph (f) of this section. Before
computing the amortization deduction
allowable under section 169, the
adjusted basis for purposes of
determining gain for a facility that is
placed in service by a taxpayer after
September 10, 2001, and that is
qualified property under section
168(k)(2) or § 1.168(k)-1T, 50-percent
bonus depreciation property under
section 168(k)(4) or § 1.168(k)-1T, or
qualified New York Liberty Zone
property under section 1400L(b) or
§ 1.1400L(b)-1T must be reduced by the
amount of the additional first year
depreciation deduction allowed or
allowable, whichever is greater, under

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section 168(k) or section 1400L(b), as
applicable, for the facility.
(b) Limitation on post-1968
construction, reconstruction, or
erection. (1) For further guidance, see
§ 1.169–3(b)(1).
(2) If the taxpayer elects to begin the
60-month amortization period with the
first month of the taxable year
succeeding the taxable year in which
the facility is completed or acquired and
a depreciation deduction is allowable
under section 167 (including an
additional first-year depreciation
allowance under former section 179; for
a facility that is acquired by the
taxpayer after September 10, 2001, and
that is qualified property under section
168(k)(2) or § 1.168(k)-1T or qualified
New York Liberty Zone property under
section 1400L(b) or § 1.1400L(b)-1T, the
additional first year depreciation
deduction under section 168(k)(1) or
1400L(b), as applicable; and for a
facility that is acquired by the taxpayer
after May 5, 2003, and that is 50-percent
bonus depreciation property under
section 168(k)(4) or § 1.168(k)-1T, the
additional first year depreciation
deduction under section 168(k)(4)) with
respect to the facility for the taxable
year in which it is completed or
acquired, the amount determined under
paragraph (b)(1) of this section shall be
reduced by an amount equal to the
amount of the depreciation deduction
allowed or allowable, whichever is
greater, multiplied by a fraction the
numerator of which is the amount
determined under paragraph (b)(1) of
this section, and the denominator of
which is the facility’s total cost. The
additional first-year allowance for
depreciation under former section 179
will be allowable only for the taxable
year in which the facility is completed
or acquired and only if the taxpayer
elects to begin the amortization
deduction under section 169 with the
taxable year succeeding the taxable year
in which such facility is completed or
acquired. For a facility that is acquired
by a taxpayer after September 10, 2001,
and that is qualified property under
section 168(k)(2) or § 1.168(k)-1T or
qualified New York Liberty Zone
property under section 1400L(b) or
§ 1.1400L(b)-1T, see § 1.168(k)-1T(f)(4)
or § 1.1400L(b)-1T(f)(4), as applicable,
with respect to when the additional first
year depreciation deduction under
section 168(k)(1) or 1400L(b) is
allowable. For a facility that is acquired
by a taxpayer after May 5, 2003, and that
is 50-percent bonus depreciation
property under section 168(k)(4) or
§ 1.168(k)-1T, see § 1.168(k)-1T(f)(4)
with respect to when the additional first

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year depreciation deduction under
section 168(k)(4) is allowable.
(c) through (f) For further guidance,
see § 1.169–3(c) through (f).
(g) Effective date for qualified
property, 50-percent bonus depreciation
property, and qualified New York
Liberty Zone property. This section
applies to a certified pollution control
facility. This section also applies to a
certified pollution control facility that is
qualified property under section
168(k)(2) or qualified New York Liberty
Zone property under section 1400L(b)
acquired by a taxpayer after September
10, 2001, and to a certified pollution
control facility that is 50-percent bonus
depreciation property under section
168(k)(4) acquired by a taxpayer after
May 5, 2003. This section expires on
September 8, 2003.
■ Par. 10. Section 1.1400L(b)–1T is
added to read as follows:
§ 1.1400L(b)–1T Additional first year
depreciation deduction for qualified New
York Liberty Zone property (temporary).

(a) Scope. This section provides the
rules for determining the 30-percent
additional first year depreciation
deduction allowable under section
1400L(b) for qualified New York Liberty
Zone property.
(b) Definitions. For purposes of
section 1400L(b) and this section, the
definitions of the terms in § 1.168(k)–
1T(a)(2) apply and the following
definitions also apply:
(1) Building and structural
components have the same meanings as
those terms are defined in § 1.48–1(e).
(2) New York Liberty Zone is the area
located on or south of Canal Street, East
Broadway (east of its intersection with
Canal Street), or Grand Street (east of its
intersection with East Broadway) in the
Borough of Manhattan in the City of
New York, New York.
(3) Nonresidential real property and
residential rental property have the
same meanings as those terms are
defined in section 168(e)(2).
(4) Real property is a building or its
structural components, or other tangible
real property except property described
in section 1245(a)(3)(B) (relating to
depreciable property used as an integral
part of a specified activity or as a
specified facility), section 1245(a)(3)(D)
(relating to single purpose agricultural
or horticultural structure), or section
1245(a)(3)(E) (relating to a storage
facility used in connection with the
distribution of petroleum or any
primary product of petroleum).
(c) Qualified New York Liberty Zone
property—(1) In general. Qualified New
York Liberty Zone property is
depreciable property that—

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Federal Register / Vol. 68, No. 173 / Monday, September 8, 2003 / Rules and Regulations
(i) Meets the requirements in
§ 1.1400L(b)–1T(c)(2) (description of
property);
(ii) Meets the requirements in
§ 1.1400L(b)–1T(c)(3) (substantial use);
(iii) Meets the requirements in
§ 1.1400L(b)–1T(c)(4) (original use);
(iv) Meets the requirements in
§ 1.1400L(b)–1T(c)(5) (acquisition of
property by purchase); and
(v) Meets the requirements in
§ 1.1400L(b)–1T(c)(6) (placed-in-service
date).
(2) Description of qualified New York
Liberty Zone property—(i) In general.
Depreciable property will meet the
requirements of this paragraph (c)(2) if
the property is—
(A) Described in § 1.168(k)–
1T(b)(2)(i); or
(B) Nonresidential real property or
residential rental property depreciated
under section 168, but only to the extent
it rehabilitates real property damaged,
or replaces real property destroyed or
condemned, as a result of the terrorist
attacks of September 11, 2001. Property
is treated as replacing destroyed or
condemned property if, as part of an
integrated plan, the property replaces
real property that is included in a
continuous area that includes real
property destroyed or condemned. For
purposes of this section, real property is
considered as destroyed or condemned
only if an entire building or structure
was destroyed or condemned as a result
of the terrorist attacks of September 11,
2001. Otherwise, the real property is
considered damaged real property. For
example, if certain structural
components (for example, walls, floors,
and plumbing fixtures) of a building are
damaged or destroyed as a result of the
terrorist attacks of September 11, 2001,
but the building is not destroyed or
condemned, then only costs related to
replacing the damaged or destroyed
structural components qualify under
this paragraph (c)(2)(i)(B).
(ii) Property not eligible for additional
first year depreciation deduction.
Depreciable property will not meet the
requirements of this paragraph (c)(2)
if—
(A) Section 168(k) or § 1.168(k)–1T
applies to the property; or
(B) The property is described in
section § 1.168(k)–1T(b)(2)(ii).
(3) Substantial use. Depreciable
property will meet the requirements of
this paragraph (c)(3) if substantially all
of the use of the property is in the New
York Liberty Zone and is in the active
conduct of a trade or business by the
taxpayer in New York Liberty Zone. For
purposes of this paragraph (c)(3),
‘‘substantially all’’ means 80 percent or
more.

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(4) Original use. Depreciable property
will meet the requirements of this
paragraph (c)(4) if the original use of the
property commences with the taxpayer
in the New York Liberty Zone after
September 10, 2001. The original use
rules in § 1.168(k)–1T(b)(3) apply for
purposes of this paragraph (c)(4). In
addition, used property will satisfy the
original use requirement in this
paragraph (c)(4) so long as the property
has not been previously used within the
New York Liberty Zone.
(5) Acquisition of property by
purchase—(i) In general. Depreciable
property will meet the requirements of
this paragraph (c)(5) if the property is
acquired by the taxpayer by purchase
(as defined in section 179(d) and
§ 1.179–4(c)) after September 10, 2001,
but only if no written binding contract
for the acquisition of the property was
in effect before September 11, 2001. For
purposes of this paragraph (c)(5), the
rules in § 1.168(k)–1T(b)(4)(ii) (binding
contract), the rules in § 1.168(k)–
1T(b)(4)(iii) (self-constructed property),
and the rules in § 1.168(k)–1T(b)(4)(iv)
(disqualified transactions) apply. For
purposes of the preceding sentence, the
rules in § 1.168(k)–1T(b)(4)(iii) shall be
applied without regard to ‘and before
January 1, 2005.’
(ii) Exception for certain transactions.
For purposes of this section, the new
partnership of a transaction described in
§ 1.168(k)–1T(f)(1)(ii) (technical
termination of a partnership) or the
transferee of a transaction described in
§ 1.168(k)–1T(f)(1)(iii) (section 168(i)(7)
transactions) is deemed to acquire the
depreciable property by purchase.
(6) Placed-in-service date. Depreciable
property will meet the requirements of
this paragraph (c)(6) if the property is
placed in service by the taxpayer on or
before December 31, 2006. However,
nonresidential real property and
residential rental property described in
paragraph (c)(2)(i)(B) of this section
must be placed in service by the
taxpayer on or before December 31,
2009. The rules in § 1.168(k)–1T(b)(5)(ii)
(relating to sale-leaseback and
syndication transactions), the rules in
§ 1.168(k)–1T(b)(5)(iii) (relating to a
technical termination of a partnership
under section 708(b)(1)(B)), and the
rules in § 1.168(k)–1T(b)(5)(iv) (relating
to section 168(i)(7) transactions) apply
for purposes of this paragraph (c)(6).
(d) Computation of depreciation
deduction for qualified New York
Liberty Zone property. The computation
of the allowable additional first year
depreciation deduction and the
otherwise allowable depreciation
deduction for qualified New York
Liberty Zone property is made in

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53005

accordance with the rules for qualified
property in § 1.168(k)–1T(d)(1)(i) and
(2).
(e) Election not to deduct additional
first year depreciation—(1) In general. A
taxpayer may make an election not to
deduct the 30-percent additional first
year depreciation for any class of
property that is qualified New York
Liberty Zone property placed in service
during the taxable year. If a taxpayer
makes an election under this paragraph
(e), the election applies to all qualified
New York Liberty Zone 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 class of
property.
(2) Definition of class of property. For
purposes of this paragraph (e), the term
class of property means—
(i) Except for the property described
in paragraphs (e)(2)(ii), (iv), and (v) of
this section, each class of property
described in section 168(e) (for example,
5-year property);
(ii) Water utility property as defined
in section 168(e)(5) and depreciated
under section 168;
(iii) Computer software as defined in,
and depreciated under, section 167(f)(1)
and the regulations thereunder;
(iv) Nonresidential real property as
defined in paragraph (b)(3) of this
section and as described in paragraph
(c)(2)(B) of this section; or
(v) Residential rental property as
defined in paragraph (b)(3) of this
section and as described in paragraph
(c)(2)(B) of this section
(3) Time and manner for making
election—(i) Time for making election.
Except as provided in paragraph (e)(4)
of this section, the election specified in
paragraph (e)(1) 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
New York Liberty Zone property is
placed in service by the taxpayer
(ii) Manner of making election. Except
as provided in paragraph (e)(4) of this
section, the election specified in
paragraph (e)(1) 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 New York Liberty Zone
property (for example, for each member
of a consolidated group by the common
parent of the group, by the partnership,
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.

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(4) Special rules for 2000 or 2001
returns. For the election specified in
paragraph (e)(1) of this section for
qualified New York Liberty Zone
property placed in service by the
taxpayer during the taxable year that
included September 11, 2001, the
taxpayer should refer to the guidance
provided by the Internal Revenue
Service for the time and manner of
making this election on the 2000 or
2001 Federal tax return for the taxable
year that included September 11, 2001
(for further guidance, see sections
3.03(3) and 4 of Rev. Proc. 2002–33
(2002–1 C.B. 963), Rev. Proc. 2003–50
(2003–29 I.R.B. 119), and
§ 601.601(d)(2)(ii)(b) of this chapter).
(5) Failure to make election. If a
taxpayer does not make the election
specified in paragraph (e)(1) of this
section within the time and in the
manner prescribed in paragraph (e)(3) or
(e)(4) of this section, the amount of
depreciation allowable for that property
under section 167(f)(1) or under section
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
depreciation deduction. Thus, the
election specified in paragraph (e)(1) 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).
(f) Special rules—(1) Property placed
in service and disposed of in the same
taxable year. Rules similar to those
provided in § 1.168(k)–1T(f)(1) apply for
purposes of this paragraph (f)(1).
(2) Redetermination of basis. If the
unadjusted depreciable basis (as defined
in § 1.168(k)–1T(a)(2)(iii)) of qualified
New York Liberty Zone property is
redetermined (for example, due to
contingent purchase price or discharge
of indebtedness) on or before December
31, 2006 (or on or before December 31,
2009, for nonresidential real property
and residential rental property
described in paragraph (c)(2)(i)(B) of
this section), the additional first year
depreciation deduction allowable for
the qualified New York Liberty Zone
property is redetermined in accordance
with the rules provided in § 1.168(k)–
1T(f)(2).
(3) Section 1245 and 1250
depreciation recapture. The rules
provided in § 1.168(k)–1T(f)(3) apply for
purposes of this paragraph (f)(3).
(4) Coordination with section 169.
Rules similar to those provided in
§ 1.168(k)–1T(f)(4) apply for purposes of
this paragraph (f)(4).

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(5) Like-kind exchanges and
involuntary conversions. This paragraph
(f)(5) applies to acquired MACRS
property (as defined in § 1.168(k)–
1T(f)(5)(ii)(A)) or acquired computer
software (as defined in § 1.168(k)–
1T(f)(5)(ii)(C)) that is eligible for the
additional first year depreciation
deduction under section 1400L(b) at the
time of replacement provided the time
of replacement is after September 10,
2001, and on or before December 31,
2006, or in the case of acquired MACRS
property or acquired computer software
that is qualified New York Liberty Zone
property described in paragraph
(c)(2)(i)(B) of this section, the time of
replacement is after September 10, 2001,
and on or before December 31, 2009.
The rules and definitions similar to
those provided in § 1.168(k)–1T(f)(5)
apply for purposes of this paragraph
(f)(5).
(6) Change in use. Rules similar to
those provided in § 1.168(k)–1T(f)(6)
apply for purposes of this paragraph
(f)(6).
(7) Earnings and profits. The rule
provided in § 1.168(k)–1T(f)(7) applies
for purposes of this paragraph (f)(7).
(8) Section 754 election. Rules similar
to those provided in § 1.168(k)–1T(f)(9)
apply for purposes of this paragraph
(f)(8).
(g) Effective date—(1) In general.
Except as provided in paragraphs (g)(2)
and (3) of this section, this section
applies to qualified New York Liberty
Zone property acquired by a taxpayer
after September 10, 2001. This section
expires on September 8, 2006.
(2) Technical termination of a
partnership or section 168(i)(7)
transactions. If qualified New York
Liberty Zone property is transferred in
a technical termination of a partnership
under section 708(b)(1)(B) or in a
transaction described in section
168(i)(7) for a taxable year ending on or
before September 8, 2003, and the
additional first year depreciation
deduction allowable for the property
was not determined in accordance with
paragraph (f)(1) of this section, the
Internal Revenue Service will allow any
reasonable method of determining the
additional first year depreciation
deduction allowable for the property in
the year of the transaction that is
consistently applied to the property by
all parties to the transaction.
(3) Like-kind exchanges and
involuntary conversions. If a taxpayer
did not claim on a federal tax return for
a taxable year ending on or before
September 8, 2003, the additional first
year depreciation deduction for the
remaining carryover basis of qualified
New York Liberty Zone property

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acquired in a transaction described in
section 1031(a), (b), or (c), or in a
transaction to which section 1033
applies and the taxpayer did not make
an election not to deduct the additional
first year depreciation deduction for the
class of property applicable to the
remaining carryover basis, the Internal
Revenue Service will treat the
taxpayer’s method of not claiming the
additional first year depreciation
deduction for the remaining carryover
basis as a permissible method of
accounting and will treat the amount of
the additional first year depreciation
deduction allowable for the remaining
carryover basis as being equal to zero,
provided the taxpayer does not claim
the additional first year depreciation
deduction for the remaining carryover
basis in accordance with paragraph
(g)(4)(ii) of this section.
(4) Change in method of accounting—
(i) Special rules for 2000 or 2001
returns. If a taxpayer did not claim on
the federal tax return for the taxable
year that included September 11, 2001,
any additional first year depreciation
deduction for a class of property that is
qualified New York Liberty Zone
property and did not make an election
not to deduct the additional first year
depreciation deduction for that class of
property, the taxpayer should refer to
the guidance provided by the Internal
Revenue Service for the time and
manner of claiming the additional first
year depreciation deduction for the
class of property (for further guidance,
see section 4 of Rev. Proc. 2002–33
(2002–1 C.B. 963), Rev. Proc. 2003–50
(2003–29 I.R.B. 119), and
§ 601.601(d)(2)(ii)(b) of this chapter).
(ii) Like-kind exchanges and
involuntary conversions. If a taxpayer
did not claim on a federal tax return for
any taxable year ending on or before
September 8, 2003, the additional first
year depreciation deduction allowable
for the remaining carryover basis of
qualified New York Liberty Zone
property acquired in a transaction
described in section 1031(a), (b), or (c),
or in a transaction to which section
1033 applies and the taxpayer did not
make an election not to deduct the
additional first year depreciation
deduction for the class of property
applicable to the remaining carryover
basis, the taxpayer may claim the
additional first year depreciation
deduction allowable for the remaining
carryover basis in accordance with
paragraph (f)(5) of this section either—
(A) By filing an amended return (or a
qualified amended return, if applicable
(for further guidance, see Rev. Proc. 94–
69 (1994–2 C.B. 804) and
§ 601.601(d)(2)(ii)(b) of this chapter)) on

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or before December 31, 2003, for the
year of replacement and any affected
subsequent taxable year; or,
(B) By following the applicable
administrative procedures issued under
§ 1.446–1(e)(3)(ii) for obtaining the
Commissioner’s automatic consent to a

change in method of accounting (for
further guidance, see Rev. Proc. 2002–9

(2002–1 C.B. 327) and
§ 601.601(d)(2)(ii)(b) of this chapter).
Robert E. Wenzel,
Deputy Commissioner for Services and
Enforcement.
Approved: August 29, 2003.
Gregory F. Jenner,
Deputy Assistant Secretary of the Treasury
(Tax Policy).
[FR Doc. 03–22670 Filed 9–5–03; 8:45 am]
BILLING CODE 4830–01–P

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