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

(A) A transferor of an asset to a transferee in a transaction to which section 381(a) applies;

(B) A transferor of the asset to a transferee in a transaction in which the transferee’s basis in the asset is determined, in whole or in part, by reference to the basis of the asset in the hands of the transferor;

(C) A partnership that is considered as continuing under section 708(b)(2) and §1.708-1;or

(D) The decedent in the case of an asset acquired by the estate.

(A) MACRS property, as defined in §1.168(b)-1(a)(2), that has a recovery period of 20 years or less. For purposes of this paragraph (b)(2)(i)(A) and section 168(k)(2)(A)(i)(I), the recovery period is determined in accordance with section 168(c) regardless of any election made by the taxpayer under section 168(g)(7). This paragraph (b)(2)(i)(A) includes the following MACRS property that is acquired by the taxpayer after September 27, 2017, and placed in service by the taxpayer after September 27, 2017, and before January 1, 2018:

(B) Computer software as defined in, and depreciated under, section 167(f)(1) and §1.167(a)-14;

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

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

(E) A qualified film or television production, as defined in section 181(d) and §1.181-3, for which a deduction would have been allowable under section 181 and §§1.181-1 through 1.181-6 without regard to section 181(a)(2) and (g), §1.181-1(b)(1)(i) and (ii), and (b)(2)(i), or section 168(k). Only production costs of a qualified film or television production are allowable as a deduction under section 181 and §§1.181-1 through 1.181-6 without regard, for purposes of section 168(k), to section 181(a)(2) and (g), §1.181-1(b)(1)(i) and (ii), and (b)(2)(i). The taxpayer that claims the additional first year depreciation deduction under this section for the production costs of a qualified film or television production must be the owner, as defined in §1.181-1(a)(2), of the qualified film or television production. See §1.181-1(a)(3) for the definition of production costs;

(F) A qualified live theatrical production, as defined in section 181(e), for which a deduction would have been allowable under section 181 and §§1.181-1 through 1.181-6 without regard to section 181(a)(2) and (g), §1.181-1(b)(1)(i) and (ii), and (b)(2)(i), or section 168(k). Only production costs of a qualified live theatrical production are allowable as a deduction under section 181 and §§1.181-1 through 1.181-6 without regard, for purposes of section 168(k), to section 181(a)(2) and (g), §1.181-1(b)(1)(i) and (ii), and (b)(2)(i). The taxpayer that claims the additional first year depreciation deduction under this section for the production costs of a qualified live theatrical production must be the owner, as defined in §1.181-1(a)(2), of the qualified live theatrical production. In applying §1.181-1(a)(2)(ii) to a person that acquires a finished or partially-finished qualified live theatrical production, such person is treated as an owner of that production, but only if the production is acquired prior to its initial live staged performance. Rules similar to the rules in §1.181-1(a)(3) for the definition of production costs of a qualified film or television production apply for defining production costs of a qualified live theatrical production; or

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

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

(B) Required to be depreciated under the alternative depreciation system of section 168(g) pursuant to section 168(g)(1)(A), (B), (C), (D), (F), or (G), or other provisions of the Internal Revenue Code (for example, property described in section 263A(e)(2)(A) if the taxpayer or any related person, as defined in section 263A(e)(2)(B), has made an election under section 263A(d)(3), or property described in section 280F(b)(1)). If section 168(h)(6) applies to the property, only the tax-exempt entity’s proportionate share of the property, as determined under section 168(h)(6), is treated as tax-exempt use property described in section 168(g)(1)(B) and in this paragraph (b)(2)(ii)(B). This paragraph (b)(2)(ii)(B) does not apply to property for which the adjusted basis is required to be determined using the alternative depreciation system of section 168(g) pursuant to section 250(b)(2)(B) or 951A(d)(3), as applicable, or to property for which the adjusted basis is required to be determined using the alternative depreciation system of section 168(g) for allocating business interest expense between excepted and non-excepted trades or businesses under section 163(j), but only if the property is not required to be depreciated under the alternative depreciation system of section 168(g) pursuant to section 168(g)(1)(A), (B), (C), (D), (F), or (G), or other provisions of the Code, other than section 163(j), 250(b)(2)(B), or 951A(d)(3), as applicable;

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

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

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

(F) Primarily used in a trade or business described in section 163(j)(7)(A)(iv) and §§1.163(j)-1(b)(15)(i) and 1.163(j)-10(c)(3)(iii)(C)(3), and placed in service by the taxpayer in any taxable year beginning after December 31, 2017. For purposes of section 168(k)(9)(A) and this paragraph (b)(2)(ii)(F), the term primarily used has the same meaning as that term is used in §1.167(a)-11(b)(4)(iii)(b) and (e)(3)(iii) for classifying property. This paragraph (b)(2)(ii)(F) does not apply to property that is leased to a lessee’s trade or business described in section 163(j)(7)(A)(iv) and §§1.163(j)-1(b)(15)(i) and 1.163(j)-10(c)(3)(iii)(C)(3), by a lessor’s trade or business that is not described in section 163(j)(7)(A)(iv) and §§1.163(j)-1(b)(15)(i) and 1.163(j)-10(c)(3)(iii)(C)(3) for the taxable year; or

(G) Used in a trade or business that has had floor plan financing indebtedness, as defined in section 163(j)(9)(B) and §1.163(j)-1(b)(18), if the floor plan financing interest expense, as defined in section 163(j)(9)(A) and §1.163(j)-1(b)(19), related to such indebtedness is taken into account under section 163(j)(1)(C) for the taxable year. Such property also must be placed in service by the taxpayer in any taxable year beginning after December 31, 2017. Solely for purposes of section 168(k)(9)(B) and this paragraph (b)(2)(ii)(G), floor plan financing interest expense is taken into account for the taxable year by a trade or business that has had floor plan financing indebtedness only if the business interest expense, as defined in section 163(j)(5) and §1.163(j)-1(b)(3), of the trade or business for the taxable year (which includes floor plan financing interest expense) exceeds the sum of the amounts calculated under section 163(j)(1)(A) and (B) for the trade or business for the taxable year. If the trade or business has taken floor plan financing interest expense into account pursuant to this paragraph (b)(2)(ii)(G) for a taxable year, this paragraph (b)(2)(ii)(G) applies to any property placed in service by that trade or business in that taxable year. This paragraph (b)(2)(ii)(G) does not apply to property that is leased to a lessee’s trade or business that has had floor plan financing indebtedness, by a lessor’s trade or business that has not had floor plan financing indebtedness during the taxable year or that has had floor plan financing indebtedness but did not take into account floor plan financing interest expense for the taxable year pursuant to this paragraph (b)(2)(ii)(G).

(A) Example 1. On February 8, 2018, A finishes the production of a qualified film, as defined in §1.181-3. On June 4, 2018, B acquires this finished production from A. The initial release or broadcast, as defined in §1.181-1(a)(7), of this qualified film is on July 28, 2018. Because B acquired the qualified film before its initial release or broadcast, B is treated as the owner of the qualified film for purposes of section 181 and §1.181-1(a)(2). Assuming all other requirements of this section are met and all requirements of section 181 and §§1.181-1 through 1.181-6, other than section 181(a)(2) and (g), and §1.181-1(b)(1)(i) and (ii), and (b)(2)(i), are met, B’s acquisition cost of the qualified film qualifies for the additional first year depreciation deduction under this section.

(B) Example 2. The facts are the same as in Example 1 of paragraph (b)(2)(iii)(A) of this section, except that B acquires a limited license or right to release the qualified film in Europe. As a result, B is not treated as the owner of the qualified film pursuant to §1.181-1(a)(2). Accordingly, paragraph (b)(2)(i)(E) of this section is not satisfied, and B’s acquisition cost of the license or right does not qualify for the additional first year depreciation deduction.

(C) Example 3. C owns a film library. All of the films in this film library are completed and have been released or broadcasted. In 2018, D buys this film library from C. Because D acquired the films after their initial release or broadcast, D’s acquisition cost of the film library does not qualify for a deduction under section 181. As a result, paragraph (b)(2)(i)(E) of this section is not satisfied, and D’s acquisition cost of the film library does not qualify for the additional first year depreciation deduction.

(D) Example 4. During 2019, E Corporation, a domestic corporation, acquired new equipment for use in its manufacturing trade or business in Mexico. To determine its qualified business asset investment for purposes of section 250, E Corporation must determine the adjusted basis of the new equipment using the alternative depreciation system of section 168(g) pursuant to sections 250(b)(2)(B) and 951A(d)(3). E Corporation also is required to depreciate the new equipment under the alternative depreciation system of section 168(g) pursuant to section 168(g)(1)(A). As a result, the new equipment does not qualify for the additional first year depreciation deduction pursuant to paragraph (b)(2)(ii)(B) of this section.

(E) Example 5. The facts are the same as in Example 4 of paragraph (b)(2)(iii)(D) of this section, except E Corporation acquired the new equipment for use in its manufacturing trade or business in California. The new equipment is not described in section 168(g)(1)(A), (B), (C), (D), (F), or (G). No other provision of the Internal Revenue Code, other than section 250(b)(2)(B) or 951A(d)(3), requires the new equipment to be depreciated using the alternative depreciation system of section 168(g). To determine its qualified business asset investment for purposes of section 250, E Corporation must determine the adjusted basis of the new equipment using the alternative depreciation system of section 168(g) pursuant to sections 250(b)(2)(B) and 951A(d)(3). Because E Corporation is not required to depreciate the new equipment under the alternative depreciation system of section 168(g), paragraph (b)(2)(ii)(B) of this section does not apply to this new equipment. Assuming all other requirements are met, the new equipment qualifies for the additional first year depreciation deduction under this section.

(F) Example 6. In 2019, a financial institution buys new equipment for $1 million and then leases this equipment to a lessee that primarily uses the equipment in a trade or business described in section 163(j)(7)(A)(iv) and §§1.163(j)-1(b)(15)(i) and 1.163(j)-10(c)(3)(iii)(C)(3). The financial institution is not described in section 163(j)(7)(A)(iv) and §§1.163(j)-1(b)(15)(i) and §1.163(j)-10(c)(3)(iii)(C)(3). As a result, paragraph (b)(2)(ii)(F) of this section does not apply to this new equipment. Assuming all other requirements are met, the financial institution’s purchase price of $1 million for the new equipment qualifies for the additional first year depreciation deduction under this section.

(G) Example 7. During its taxable year beginning in 2020, F, a corporation that is an automobile dealer, buys new computers for $50,000 for use in its trade or business of selling automobiles. For purposes of section 163(j), F has the following for 2020: $700 of adjusted taxable income, $40 of business interest income, $400 of business interest expense (which includes $100 of floor plan financing interest expense). The sum of the amounts calculated under section 163(j)(1)(A) and (B) for F for 2020 is $390 ($40 + ($700 x 50 percent)). F’s business interest expense, which includes floor plan financing interest expense, for 2020 is $400. As a result, F’s floor plan financing interest expense is taken into account by F for 2020 pursuant to paragraph (b)(2)(ii)(G) of this section. Accordingly, F’s purchase price of $50,000 for the computers does not qualify for the additional first year depreciation deduction under this section.

(H) Example 8. The facts are the same as in Example 7 in paragraph (b)(2)(iii)(G) of this section, except F buys new computers for $30,000 for use in its trade or business of selling automobiles and, for purposes of section 163(j), F has $1,300 of adjusted taxable income. The sum of the amounts calculated under section 163(j)(1)(A) and (B) for F for 2020 is $690 ($40 + ($1,300 x 50 percent)). F’s business interest expense, which includes floor plan financing interest expense, for 2020 is $400. As a result, F’s floor plan financing interest expense is not taken into account by F for 2020 pursuant to paragraph (b)(2)(ii)(G) of this section. Assuming all other requirements are met, F’s purchase price of $30,000 for the computers qualifies for the additional first year depreciation deduction under this section.

(I) Example 9.

(A) In general. Depreciable property will meet the requirements of this paragraph (b)(3)(ii) if the original use of the property commences with the taxpayer. Except as provided in paragraphs (b)(3)(ii)(B) and (C) of this section, original use means the first use to which the property is put, whether or not that use corresponds to the use of the property by the taxpayer. Additional capital expenditures paid or incurred by a taxpayer to recondition or rebuild property acquired or owned by the taxpayer satisfy the original use requirement. However, the cost of reconditioned or rebuilt property does not satisfy the original use requirement (but may satisfy the used property acquisition requirements in paragraph (b)(3)(iii) of this section). The question of whether property is reconditioned or rebuilt property is a question of fact. For purposes of this paragraph (b)(3)(ii)(A), property that contains used parts will not be treated as reconditioned or rebuilt if the cost of the used parts is not more than 20 percent of the total cost of the property, whether acquired or self-constructed.

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

(C) Fractional interests in property. If, in the ordinary course of its business, a taxpayer sells fractional interests in new property to third parties unrelated to the taxpayer, each first fractional owner of the property is considered as the original user of its proportionate share of the property. 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 a third party unrelated to the taxpayer subsequent to the taxpayer's use of the property begins with the first purchaser of that fractional interest. For purposes of this paragraph (b)(3)(ii)(C), persons are not related if they do not have a relationship described in section 267(b) and §1.267(b)-1, or section 707(b) and §1.707-1.

(A) In general. Depreciable property will meet the requirements of this paragraph (b)(3)(iii) if the acquisition of the used property meets the following requirements:

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

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

(A) Section 704(c) remedial allocations. Remedial allocations under section 704(c) do not satisfy the requirements of paragraph (b)(3) of this section. See §1.704-3(d)(2).

(B) Basis determined under section 732. Any basis of distributed property determined under section 732 does not satisfy the requirements of paragraph (b)(3) of this section.

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

(D) Section 743(b) adjustments.

(A) The original user of the property in this transaction if the lessor acquired and placed in service new property; or

(B) The taxpayer having the depreciable interest in the property in this transaction if the lessor acquired and placed in service used property.

(A) Example 1.

(B) 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 November 1, 2017, 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 paragraph (b)(3)(ii) of this section. Assuming all other requirements are met, D's purchase price of the automobile qualifies for the additional first year depreciation deduction for D under this section, subject to any limitation under section 280F.

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

(D) Example 4. In the ordinary course of its business, G sells fractional interests in its aircraft to unrelated parties. G holds out for sale eight equal fractional interests in an aircraft. On October 1, 2017, G sells five of the eight fractional interests in the aircraft to H and H begins to use its proportionate share of the aircraft immediately upon purchase. On February 1, 2018, G sells to I the remaining unsold 3⁄8 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 its 5⁄8 fractional interest in the aircraft qualifies for the additional first year depreciation deduction under this section and I's purchase price for its 3⁄8 fractional interest in the aircraft qualifies for the additional first year depreciation deduction under this section.

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

(F) Example 6. K is in the trade or business of leasing equipment to others. During 2016, K buys a new machine (Machine #1) and then leases it to L for use in L’s trade or business. The lease between K and L for Machine #1 is a true lease for Federal income tax purposes. During 2018, L enters into a written binding contract with K to buy Machine #1 at its fair market value on May 15, 2018. L did not have any depreciable interest in Machine #1 before L acquired it on May 15, 2018. As a result, L’s acquisition of Machine #1 satisfies the used property acquisition requirements of paragraph (b)(3)(iii) of this section. Assuming all other requirements are met, L’s purchase price of Machine #1 qualifies for the additional first year depreciation deduction for L under this section.

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

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

(I) Example 9. During 2016, M and N purchased used equipment for use in their trades or businesses and each own a 50 percent interest in such equipment. Prior to this acquisition, M and N did not have any depreciable interest in the equipment. Assume this ownership arrangement is not a partnership. During 2018, N enters into a written binding contract with M to buy M’s interest in the equipment. Pursuant to paragraph (b)(3)(iii)(B)(2) of this section, N is not treated as using M’s interest in the equipment prior to N’s acquisition of M’s interest. As a result, N’s acquisition of M’s interest in the equipment satisfies the used property acquisition requirements of paragraph (b)(3)(iii) of this section. Assuming all other requirements are met, N’s purchase price of M’s interest in the equipment qualifies for the additional first year depreciation deduction for N under this section.

(J) Example 10. The facts are the same as in Example 9 of paragraph (b)(3)(vii)(I) of this section, except N had a 100-percent depreciable interest in the equipment during 2011 through 2015, and M purchased from N a 50-percent interest in the equipment during 2016. Pursuant to paragraph (b)(3)(iii)(B)(1) of this section, the lookback period is 2013 through 2017 to determine if N had a depreciable interest in M’s 50-percent interest in the equipment N acquired from M in 2018. Because N had a 100-percent depreciable interest in the equipment during 2013 through 2015, N had a depreciable interest in M’s 50-percent interest in the equipment during the lookback period. As a result, N’s acquisition of M’s interest in the equipment during 2018 does not satisfy the used property acquisition requirements of paragraphs (b)(3)(iii)(A)(1) and (b)(3)(iii)(B)(1) of this section. Paragraph (b)(3)(iii)(B)(2) of this section does not apply because N initially acquired a 100-percent depreciable interest in the equipment. Accordingly, N’s purchase price of M’s interest in the equipment during 2018 does not qualify for the additional first year depreciation deduction for N.

(K) Example 11. The facts are the same as in Example 9 of paragraph (b)(3)(vii)(I) of this section, except N had a 100-percent depreciable interest in the equipment only during 2011, and M purchased from N a 50-percent interest in the equipment during 2012. Pursuant to paragraph (b)(3)(iii)(B)(1) of this section, the lookback period is 2013 through 2017 to determine if N had a depreciable interest in M’s 50-percent interest in the equipment N acquired from M in 2018. Because N had a depreciable interest in only its 50-percent interest in the equipment during this lookback period, N’s acquisition of M’s interest in the equipment during 2018 satisfies the used property acquisition requirements of paragraphs (b)(3)(iii)(A)(1) and (b)(3)(iii)(B)(1) of this section. Assuming all other requirements are met, N’s purchase price of M’s interest in the equipment during 2018 qualifies for the additional first year depreciation deduction for N under this section.

(L) Example 12. The facts are the same as in Example 9 of paragraph (b)(3)(vii)(I) of this section, except during 2018, M also enters into a written binding contract with N to buy N’s interest in the equipment. Pursuant to paragraph (b)(3)(iii)(B)(2) of this section, both M and N are treated as previously having a depreciable interest in a 50-percent portion of the equipment. Accordingly, the acquisition by M of N’s 50-percent interest and the acquisition by N of M’s 50-percent interest in the equipment during 2018 do not qualify for the additional first year depreciation deduction.

(M) Example 13. O and P form an equal partnership, OP, in 2018. O contributes cash to OP, and P contributes equipment to OP. OP’s basis in the equipment contributed by P is determined under section 723. Because OP’s basis in such equipment is determined in whole or in part by reference to P’s adjusted basis in such equipment, OP’s acquisition of such equipment does not satisfy section 179(d)(2)(C) and §1.179-4(c)(1)(iv) and, thus, does not satisfy the used property acquisition requirements of paragraph (b)(3)(iii) of this section. Accordingly, OP’s acquisition of such equipment is not eligible for the additional first year depreciation deduction.

(N) Example 14. Q, R, and S form an equal partnership, QRS, in 2019. Each partner contributes $100, which QRS uses to purchase a retail motor fuels outlet for $300. Assume this retail motor fuels outlet is QRS’ only property and is qualified property under section 168(k)(2)(A)(i). QRS makes an election not to deduct the additional first year depreciation for all qualified property placed in service during 2019. QRS has a section 754 election in effect. QRS claimed depreciation of $15 for the retail motor fuels outlet for 2019. During 2020, when the retail motor fuels outlet’s fair market value is $600, Q sells all of its partnership interest to T in a fully taxable transaction for $200. T never previously had a depreciable interest in the retail motor fuels outlet. T takes an outside basis of $200 in the partnership interest previously owned by Q. T’s share of the partnership’s previously taxed capital is $95. Accordingly, T’s section 743(b) adjustment is $105 and is allocated entirely to the retail motor fuels outlet under section 755. Assuming all other requirements are met, T’s section 743(b) adjustment qualifies for the additional first year depreciation deduction under this section.

(O) Example 15. The facts are the same as in Example 14 of paragraph (b)(3)(vii)(N) of this section, except that Q sells his partnership interest to U, a related person within the meaning of section 179(d)(2)(A) or (B) and §1.179-4(c). U’s section 743(b) adjustment does not qualify for the additional first year depreciation deduction.

(P) Example 16. The facts are the same as in Example 14 of paragraph (b)(3)(vii)(N) of this section, except that Q dies and his partnership interest is transferred to V. V takes a basis in Q’s partnership interest under section 1014. As a result, section 179(d)(2)(C)(ii) and §1.179-4(c)(1)(iv) are not satisfied, and V’s section 743(b) adjustment does not qualify for the additional first year depreciation deduction.

(Q) Example 17. The facts are the same as in Example 14 of paragraph (b)(3)(vii)(N) of this section, except that QRS purchased the retail motor fuels outlet from T prior to T purchasing Q’s partnership interest in QRS. T had a depreciable interest in such retail motor fuels outlet. Because T had a depreciable interest in the retail motor fuels outlet before T acquired its interest in QRS, T’s section 743(b) adjustment does not qualify for the additional first year depreciation deduction.

(R) Example 18.

(S) Example 19.

(T) Example 20. In November 2017, AA Corporation purchases a used drill press costing $10,000 and is granted a trade-in allowance of $2,000 on its old drill press. The used drill press is qualified property under section 168(k)(2)(A)(i). The old drill press had a basis of $1,200. Under sections 1012 and 1031(d), the basis of the used drill press is $9,200 ($1,200 basis of old drill press plus cash expended of $8,000). Only $8,000 of the basis of the used drill press satisfies the requirements of section 179(d)(3) and §1.179-4(d) and, thus, satisfies the used property acquisition requirement of paragraph (b)(3)(iii) of this section. The remaining $1,200 of the basis of the used drill press does not satisfy the requirements of section 179(d)(3) and §1.179-4(d) because it is determined by reference to the old drill press. Accordingly, assuming all other requirements are met, only $8,000 of the basis of the used drill press is eligible for the additional first year depreciation deduction under this section.

(U) Example 21.

(V) Example 22.

(W) Example 23.

(X) Example 24.

(Y) Example 25.

(Z) Example 26.

(AA) Example 27.

(BB) Example 28.

(CC) Example 29.

(DD) Example 30.

(EE) Example 31.

(FF) Example 32.

(GG) Example 33.

(HH) Example 34.

(II) Example 35.

(JJ) Example 36.

(KK) Example 37.

(LL) Example 38.

(MM) Example 39.

(NN) Example 40.

(OO) Example 41.

(A) Qualified film or television production. For purposes of this paragraph (b)(4), a qualified film or television production is treated as placed in service at the time of initial release or broadcast as defined under §1.181-1(a)(7). The taxpayer that places in service a qualified film or television production must be the owner, as defined in §1.181-1(a)(2), of the qualified film or television production.

(B) Qualified live theatrical production. For purposes of this paragraph (b)(4), a qualified live theatrical production is treated as placed in service at the time of the initial live staged performance. The taxpayer that places in service a qualified live theatrical production must be the owner, as defined in paragraph (b)(2)(i)(F) of this section and in §1.181-1(a)(2), of the qualified live theatrical production.

(A) In general. Except as provided in paragraph (b)(5)(vi) of this section, depreciable property will meet the requirements of this paragraph (b)(5) if the property is acquired by the taxpayer after September 27, 2017, or is acquired by the taxpayer pursuant to a written binding contract entered into by the taxpayer after September 27, 2017. Property that is manufactured, constructed, or produced for the taxpayer by another person under a written binding contract that is entered into prior to the manufacture, construction, or production of the property for use by the taxpayer in its trade or business or for its production of income is not acquired pursuant to a written binding contract but is considered to be self-constructed property under this paragraph (b)(5). For determination of acquisition date, see paragraph (b)(5)(ii)(B) of this section for property acquired pursuant to a written binding contract, paragraph (b)(5)(iv) of this section for self-constructed property, and paragraph (b)(5)(v) of this section for property not acquired pursuant to a written binding contract.

(B) Determination of acquisition date for property acquired pursuant to a written binding contract. Except as provided in paragraphs (b)(5)(vi) and (vii) of this section, the acquisition date of property that the taxpayer acquired pursuant to a written binding contract is the later of–

(A) In general. Except as provided in paragraph (b)(5)(iii)(G) of this section, 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, any 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. If a contract has multiple provisions that limit damages, only the provision with the highest damages is taken into account in determining whether the contract limits damages. Also, 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 did not contain a 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, the contract is not considered binding.

(B) Conditions. Except as provided in paragraph (b)(5)(iii)(G) of this section, a contract is binding even if subject to a condition, as long as the condition is not within the control of either party or a predecessor. A contract will continue to be binding if the parties make insubstantial changes in its terms and conditions or if any term is to be determined by a standard beyond the 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 certain 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) Letter of intent. A letter of intent for an acquisition is not a binding contract.

(E) 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 the property to be purchased, a purchase order under the agreement for a specific number of assets is treated as a binding contract.

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

(G) Acquisition of a trade or business or an entity. A contract to acquire all or substantially all of the assets of a trade or business or to acquire an entity (for example, a corporation, a partnership, or a limited liability company) is binding if it is enforceable under State law against the parties to the contract. The presence of a condition outside the control of the parties, including, for example, regulatory agency approval, will not prevent the contract from being a binding contract. Further, the fact that insubstantial terms remain to be negotiated by the parties to the contract, or that customary conditions remain to be satisfied, does not prevent the contract from being a binding contract. This paragraph (b)(5)(iii)(G) also applies to a contract for the sale of the stock of a corporation that is treated as an asset sale as a result of an election under section 338 or under section 336(e) made for a disposition described in §1.336-2(b)(1).

(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)(5)(ii) of this section are treated as met for the property if the taxpayer begins manufacturing, constructing, or producing the property after September 27, 2017. Property that is manufactured, constructed, or produced for the taxpayer by another person under a written binding contract, as defined in paragraph (b)(5)(iii) of this section, that is entered into prior to the manufacture, construction, or production of the property for use by the taxpayer in its trade or business or for its production of income is considered to be manufactured, constructed, or produced by the taxpayer. If a taxpayer enters into a written binding contract, as defined in paragraph (b)(5)(iii) of this section, before September 28, 2017, with another person to manufacture, construct, or produce property and the manufacture, construction, or production of this property begins after September 27, 2017, the acquisition rules in paragraph (b)(5)(ii) of this section are met.

(B) When does manufacture, construction, or production begin.

(C) Components of self-constructed property.

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

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

(A) Example 1. On September 1, 2017, BB, a corporation, entered into a written agreement with CC, 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)(5)(iii)(E) of this section.

(B) Example 2. The facts are the same as in Example 1 of paragraph (b)(5)(viii)(A) of this section. On December 1, 2017, BB placed a purchase order with CC 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 BB with CC on December 1, 2017, is a binding contract pursuant to paragraph (b)(5)(iii)(E) of this section. Accordingly, assuming all other requirements are met, the cost of the 20 lamps qualifies for the 100-percent additional first year depreciation deduction.

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

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

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

(F) Example 6. On August 15, 2017, EE, an accrual basis taxpayer, entered into a written binding contract with FF to manufacture an aircraft described in section 168(k)(2)(C) for use in EE's trade or business. FF begins to manufacture the aircraft on October 1, 2017. The completed aircraft is delivered to EE on February 15, 2018, at which time EE incurred the total cost of the aircraft. EE places the aircraft in service on March 1, 2018. Pursuant to paragraphs (b)(5)(ii)(A) and (b)(5)(iv)(A) of this section, the aircraft is considered to be manufactured by EE. Because EE began manufacturing the aircraft after September 27, 2017, the aircraft qualifies for the 100-percent additional first year depreciation deduction, assuming all other requirements are met.

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

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

(I) Example 9. On September 1, 2017, II acquired and placed in service equipment. On January 15, 2018, II sells the equipment to JJ and leases the property back from JJ in a sale-leaseback transaction. Pursuant to paragraph (b)(5)(ii) of this section, II’s cost of the equipment does not qualify for the 100-percent additional first year depreciation deduction because II acquired the equipment prior to September 28, 2017. However, JJ acquired used equipment from an unrelated party after September 27, 2017, and, assuming all other requirements are met, JJ’s cost of the used equipment qualifies for the 100-percent additional first year depreciation deduction for JJ.

(J) Example 10. On July 1, 2017, KK began constructing property for its own use in its trade or business. KK placed this property in service on September 15, 2017. On January 15, 2018, KK sells the property to LL and leases the property back from LL in a sale-leaseback transaction. Pursuant to paragraph (b)(5)(iv) of this section, KK’s cost of the property does not qualify for the 100-percent additional first year depreciation deduction because KK began construction of the property prior to September 28, 2017. However, LL acquired used property from an unrelated party after September 27, 2017, and, assuming all other requirements are met, LL’s cost of the used property qualifies for the 100-percent additional first year depreciation deduction for LL.

(K) Example 11. MM, a calendar year taxpayer, is engaged in a trade or business described in section 163(j)(7)(A)(iv). In December 2018, MM began constructing a new electric generation power plant for its own use. MM placed in service this new power plant, including all component parts, in 2020. Even though MM began constructing the power plant after September 27, 2017, none of MM’s total expenditures of the power plant qualify for the additional first year depreciation deduction under this section because, pursuant to paragraph (b)(2)(ii)(F) of this section, the power plant is property that is primarily used in a trade or business described in section 163(j)(7)(A)(iv) and the power plant was placed in service in MM’s taxable year beginning after 2017.

(A) That is described in paragraph (b)(2)(i)(A), (B), (C), or (D) of this section. Solely for purposes of the preceding sentence, the requirement that property has to be acquired after September 27, 2017, is disregarded;

(B) That meets the requirements under paragraph (b) of this section, determined without regard to the acquisition date requirement in paragraph (b)(5) of this section; and

(C) For which the taxpayer begins the manufacture, construction, or production before September 28, 2017.

(A) Paragraph (b)(5)(iv)(B) of this section if the component is manufactured, constructed, or produced by the taxpayer for its own use in its trade or business or for its production of income, or is manufactured, constructed, or produced for the taxpayer by another person under a written binding contract, as defined in paragraph (b)(5)(iii) of this section, that is entered into prior to the manufacture, construction, or production of the component for use by the taxpayer in its trade or business or for its production of income; or

(B) Paragraph (b)(5)(v) of this section if the component is manufactured, constructed, or produced for the taxpayer by another person under a written contract that does not meet the definition of a binding contract in paragraph (b)(5)(iii) of this section, that is entered into prior to the manufacture, construction, or production of the component for use by the taxpayer in its trade or business or for its production of income.

(A) BC, a calendar year taxpayer, is engaged in a trade or business described in section 163(j)(7)(A)(iv) and §§1.163(j)-1(b)(15)(i) and 1.163(j)-10(c)(3)(iii)(C)(3). In December 2015, BC decided to construct an electric generation power plant for its own use. This plant is property described in section 168(k)(2)(B) as in effect on the day before the date of the enactment of the Act. However, the turbine for the plant had to be manufactured by another person for BC. In January 2016, BC entered into a written binding contract with CD to acquire the turbine. BC received the completed turbine in August 2017 at which time BC incurred the cost of the turbine. The cost of the turbine is 11 percent of the total cost of the electric generation power plant to be constructed by BC. BC began constructing the electric generation power plant in October 2017 and placed in service this new power plant, including all component parts, in 2020.

(B) The larger self-constructed property is the electric generation power plant to be constructed by BC. For determining if the construction of this power plant begins before September 28, 2017, paragraph (b)(5)(iv)(B) of this section provides that manufacture, construction, or production of property begins when physical work of a significant nature begins. BC uses the safe harbor test in paragraph (b)(5)(iv)(B)(2) of this section to determine when physical work of a significant nature begins for the electric generation power plant. Because the turbine that was manufactured by CD for BC is more than 10 percent of the total cost of the electric generation power plant, physical work of a significant nature for this plant began before September 28, 2017.

(C) The power plant is described in section 168(k)(9)(A) and paragraph (b)(2)(ii)(F) of this section and, therefore, is not larger self-constructed property eligible for the election pursuant to paragraph (c)(2)(i)(B) of this section. Accordingly, none of BC’s expenditures for components of the power plant that are acquired or self-constructed after September 27, 2017, are eligible for the election specified in this paragraph (c). Assuming all requirements are met under section 168(k)(2) as in effect on the day before the date of the enactment of the Act, the unadjusted depreciable basis of the power plant, including all components, attributable to its construction before January 1, 2020, is eligible for the 30-percent additional first year depreciation deduction pursuant to section 168(k)(8).

(A) In August 2017, BD, a calendar-year taxpayer, entered into a written binding contract with CE for CE to manufacture a locomotive for BD for use in its trade or business. Before September 28, 2017, BD acquired or self-constructed components of the locomotive. These components cost $500,000, which is more than 10 percent of the total cost of the locomotive, and BD incurred such costs before September 28, 2017. After September 27, 2017, BD acquired or self-constructed components of the locomotive and these components cost $4,000,000. In February 2019, CE delivered the locomotive to BD and BD placed in service the locomotive. The total cost of the locomotive is $4,500,000. The locomotive is property described in section 168(k)(2)(B) as in effect on the day before the date of the enactment of the Act. On its timely filed Federal income tax return for 2019, BD made the election specified in this paragraph (c).

(B) The larger self-constructed property is the locomotive being manufactured by CE for BD. For determining if the manufacturing of this locomotive begins before September 28, 2017, paragraph (b)(5)(iv)(B) of this section provides that manufacture, construction, or production of property begins when physical work of a significant nature begins. BD uses the safe harbor test in paragraph (b)(5)(iv)(B)(2) of this section to determine when physical work of a significant nature begins for the locomotive. Because BD had incurred more than 10 percent of the total cost of the locomotive before September 28, 2017, physical work of a significant nature for this locomotive began before September 28, 2017.

(C) Because BD made the election specified in this paragraph (c), the cost of $4,000,000 for the locomotive’s components acquired or self-constructed after September 27, 2017, qualifies for the 100-percent additional first year depreciation deduction under this section, assuming all other requirements are met. The remaining cost of the locomotive is $500,000 and such amount qualifies for the 40-percent additional first year depreciation deduction pursuant to section 168(k)(8), assuming all other requirements in section 168(k) as in effect on the day before the date of the enactment of the Act are met.

(A) In February 2016, BF, a calendar-year taxpayer, entered into a written binding contract with CG for CG to manufacture a vessel for BF for use in its trade or business. Before September 28, 2017, BF acquired or self-constructed components for the vessel. These components cost $30,000,000, which is more than 10 percent of the total cost of the vessel, and BF incurred such costs before September 28, 2017. After September 27, 2017, BF acquired or self-constructed components for the vessel and these components cost $15,000,000. In February 2021, CG delivered the vessel to BF and BF placed in service the vessel. The vessel is property described in section 168(k)(2)(B) as in effect on the day before the date of the enactment of the Act. The total cost of the vessel is $45,000,000. On its timely filed Federal income tax return for 2021, BF made the election specified in this paragraph (c).

(B) The larger self-constructed property is the vessel being manufactured by CG for BF. For determining if the manufacturing of this vessel begins before September 28, 2017, paragraph (b)(5)(iv)(B) of this section provides that manufacture, construction, or production of property begins when physical work of a significant nature begins. BF uses the safe harbor test in paragraph (b)(5)(iv)(B)(2) of this section to determine when physical work of a significant nature begins for the vessel. Because BF had incurred more than 10 percent of the total cost of the vessel before September 28, 2017, physical work of a significant nature for this vessel began before September 28, 2017.

(C) Because BF made the election specified in this paragraph (c), the cost of $15,000,000 for the vessel’s components acquired or self-constructed after September 27, 2017, qualifies for the 100-percent additional first year depreciation deduction under this section, assuming all other requirements are met. Pursuant to section 168(k)(8) and because BF placed in service the vessel after 2020, none of the remaining cost of the vessel is eligible for any additional first year depreciation deduction under section 168(k) and this section nor under section 168(k) as in effect on the day before the date of the enactment of the Act.

(A) In March 2017, BG, a calendar year taxpayer, entered into a written contract with CH for CH to construct a building for BG to use in its retail business. This written contract does not meet the definition of a binding contract in paragraph (b)(5)(iii) of this section. In September 2019, the construction of the building was completed and placed in service by BG. The total cost is $10,000,000. Of this amount, $3,000,000 is the total cost for all section 1245 properties constructed as part of the building, and $7,000,000 is for the building. Under section 168(e), section 1245 properties in the total amount of $2,400,000 are 5-year property and in the total amount of $600,000 are 7-year property. The building is nonresidential real property under section 168(e). Before September 28, 2017, BG acquired or self-constructed certain components and the total cost of these components is $500,000 for the section 1245 properties and $3,000,000 for the building. BG incurred these costs before September 28, 2017. After September 27, 2017, BG acquired or self-constructed the remaining components of the section 1245 properties and these components cost $2,500,000. BG incurred these costs of $2,500,000 after September 27, 2017. On its timely filed Federal income tax return for 2019, BG made the election specified in this paragraph (c).

(B) All section 1245 properties are constructed as part of the construction of the building and are described in paragraph (b)(2)(i)(A) of this section. The building is not described in paragraph (b)(2)(i)(A), (B), (C), or (D) of this section. As a result, under paragraph (c)(2)(ii) of this section, the larger self-constructed property is all section 1245 properties with a total cost of $3,000,000. For determining if the construction of these section 1245 properties begins before September 28, 2017, paragraph (b)(5)(v) of this section provides that manufacture, construction, or production of property begins when the taxpayer incurs more than 10 percent of the total cost of the property. Because BG incurred more than 10 percent of the total cost of the section 1245 properties before September 28, 2017, construction of the section 1245 properties began before September 28, 2017.

(C) Because BG made the election specified in this paragraph (c), the cost of $2,500,000 for the section 1245 components acquired or self-constructed by BG after September 27, 2017, qualifies for the 100-percent additional first year depreciation deduction under this section, assuming all other requirements are met. The remaining cost of the section 1245 components is $500,000 and such amount qualifies for the 30-percent additional first year depreciation deduction pursuant to section 168(k)(8), assuming all other requirements in section 168(k), as in effect on the day before the date of the enactment of the Act, are met. Because the building is not qualified property under section 168(k), as in effect on the day before the date of the enactment of the Act, none of the cost of $7,000,000 for the building is eligible for any additional first year depreciation deduction under section 168(k) and this section or under section 168(k), as in effect on the day before the date of the enactment of the Act.

(A) In general. For purposes of this paragraph (d)(3), manufacture, construction, or production 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 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 excavation 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 manufactured off-site and delivered to the site where the outlet will be used, manufacturing begins when physical work of a significant nature commences at the off-site location.

(B) Safe harbor. For purposes of paragraph (d)(3)(ii)(A) of this section, a taxpayer may choose to determine when physical work of a significant nature begins in accordance with this paragraph (d)(3)(ii)(B). Physical work of a significant nature will be considered to begin at the time the taxpayer incurs (in the case of an accrual basis taxpayer) or pays (in the case of a cash basis taxpayer) more than 10 percent of the total cost of the property, excluding the cost of any land and preliminary activities such as planning or designing, securing financing, exploring, or researching. When property is manufactured, constructed, or produced for the taxpayer by another person, this safe harbor test must be satisfied by the taxpayer. For example, if a retail motor fuels outlet is to be constructed for an accrual basis taxpayer by another person for the total cost of $200,000, excluding the cost of any land and preliminary activities such as planning or designing, securing financing, exploring, or researching, construction is deemed to begin for purposes of this paragraph (d)(3)(ii)(B) when the taxpayer has incurred more than 10 percent (more than $20,000) of the total cost of the property. A taxpayer chooses to apply this paragraph (d)(3)(ii)(B) by filing a Federal income tax return for the placed-in-service year of the property that determines when physical work of a significant nature begins consistent with this paragraph (d)(3)(ii)(B).

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

(B) Self-constructed components. If the manufacture, construction, or production of a component by the taxpayer does not satisfy the requirements of paragraph (d)(3)(i) of this section, the component does not qualify for the additional first year depreciation deduction under this section. However, if the manufacture, construction, or production of a component does not satisfy the requirements of paragraph (d)(3)(i) of this section, but the manufacture, construction, or production of the larger self-constructed property satisfies the requirements of paragraph (d)(3)(i) of this section, the larger self- constructed property qualifies for the additional first year depreciation deduction under this section, assuming all other requirements are met, even though the component does not qualify for the additional first year depreciation deduction under this section. Accordingly, the unadjusted depreciable basis of the larger self-constructed property that is eligible for the additional first year depreciation deduction under this section, assuming all other requirements are met, must not include the unadjusted depreciable basis of any component that does not qualify for the additional first year depreciation deduction under this section. If the manufacture, construction, or production of a component begins before January 1, 2027, but the manufacture, construction, or production of the larger self-constructed property does not begin before January 1, 2027, the component qualifies for the additional first year depreciation deduction under this section, assuming all other requirements are met, but the larger self-constructed property does not.

(A) Property that the taxpayer acquires pursuant to a contract that does not meet the definition of a written binding contract in paragraph (b)(5)(iii) of this section; or

(B) Property that is manufactured, constructed, or produced for the taxpayer by another person under a written contract that does not meet the definition of a binding contract in paragraph (b)(5)(iii) of this section, and 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 production of income.

(1) On June 1, 2016, NN decided to construct property described in section 168(k)(2)(B) for its own use. However, one of the component parts of the property had to be manufactured by another person for NN. On August 15, 2016, NN entered into a written binding contract with OO to acquire this component part of the property for $100,000. OO began manufacturing the component part on November 1, 2016, and delivered the completed component part to NN on September 1, 2017, at which time NN incurred $100,000 for the cost of the component. The cost of this component part is 9 percent of the total cost of the property to be constructed by NN. NN did not incur any other cost of the property to be constructed before NN began construction. NN began constructing the property described in section 168(k)(2)(B) on October 15, 2017, and placed in service this property, including all component parts, on November 1, 2020. NN uses the safe harbor test in paragraph (d)(3)(ii)(B) of this section to determine when physical work of a significant nature begins for the property described in section 168(k)(2)(B).

(2) Because the component part of $100,000 that was manufactured by OO for NN is not more than 10 percent of the total cost of the property described in section 168(k)(2)(B), physical work of a significant nature for the property described in section 168(k)(2)(B) did not begin before September 28, 2017.

(3) Pursuant to paragraphs (b)(5)(iv)(C)(2) and (d)(1) of this section, the self-constructed component part of $100,000 manufactured by OO for NN is not eligible for the 100-percent additional first year depreciation deduction because the manufacturing of such component part began before September 28, 2017. However, pursuant to paragraph (d)(3)(i) of this section, the cost of the property described in section 168(k)(2)(B), excluding the cost of the component part of $100,000 manufactured by OO for NN, is eligible for the 100-percent additional first year depreciation deduction, assuming all other requirements are met, because construction of the property began after September 27, 2017, and before January 1, 2027, and the property described in section 168(k)(2)(B) was placed in service by NN during 2020.

(1) On June 1, 2026, PP decided to construct property described in section 168(k)(2)(B) for its own use. However, one of the component parts of the property had to be manufactured by another person for PP. On August 15, 2026, PP entered into a written binding contract with XP to acquire this component part of the property for $100,000. XP began manufacturing the component part on September 1, 2026, and delivered the completed component part to PP on February 1, 2027, at which time PP incurred $100,000 for the cost of the component. The cost of this component part is 9 percent of the total cost of the property to be constructed by PP. PP did not incur any other cost of the property to be constructed before PP began construction. PP began constructing the property described in section 168(k)(2)(B) on January 15, 2027, and placed this property, including all component parts, in service on November 1, 2027.

(2) Pursuant to paragraph (d)(3)(iii)(B) of this section, the self-constructed component part of $100,000 manufactured by XP for PP is eligible for the additional first year depreciation deduction under this section, assuming all other requirements are met, because the manufacturing of the component part began before January 1, 2027, and the property described in section 168(k)(2)(B), the larger self-constructed property, was placed in service by PP before January 1, 2028. However, pursuant to paragraph (d)(3)(i) of this section, the cost of the property described in section 168(k)(2)(B), excluding the cost of the self-constructed component part of $100,000 manufactured by XP for PP, is not eligible for the additional first year depreciation deduction under this section because construction of the property began after December 31, 2026.

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

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

(A) In general. The additional first year depreciation deduction is allowable for alternative minimum tax purposes--

(B) Special rules. In general, the 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. However, see paragraph (g)(5)(iii)(E) of this section for qualified property acquired in a like-kind exchange or as a result of an involuntary conversion.

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

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

(C) Computer software as defined in, and depreciated under, section 167(f)(1) and §1.167(a)-14(b);

(D) Qualified improvement property as defined in §1.168(b)-1(a)(5)(i)(C) and (a)(5)(ii) (acquired by the taxpayer after September 27, 2017, and placed in service by the taxpayer after September 27, 2017, and before January 1, 2018), and depreciated under section 168;

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

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

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

(A) Time for making election. Except as provided in paragraph (f)(6) of this section, any election specified in paragraph (f)(1)(i) of this section must be made by the due date, including extensions, of the Federal tax return for the taxable year in which the qualified property is placed in service by the taxpayer.

(B) Manner of making election. Except as provided in paragraph (f)(6) of this section, any election specified in paragraph (f)(1)(i) of this section must be made in the manner prescribed on Form 4562, “Depreciation and Amortization,” and its instructions. The election is made separately by each person owning qualified property (for example, for each member of a consolidated group by the common parent of the group, by the partnership (including a lower-tier partnership; also including basis adjustments in the partnership assets under section 743(b)), or by the S corporation). If Form 4562 is revised or renumbered, any reference in this section to that form shall be treated as a reference to the revised or renumbered form.

(A) Time for making election. Except as provided in paragraph (f)(6) of this section, any election specified in paragraph (f)(2)(i) of this section must be made by the due date, including extensions, of the Federal tax return for the taxable year in which the taxpayer planted or grafted the specified plant to which the election applies.

(B) Manner of making election. Except as provided in paragraph (f)(6) of this section, any election specified in paragraph (f)(2)(i) of this section must be made in the manner prescribed on Form 4562, “Depreciation and Amortization,” and its instructions. The election is made separately by each person owning specified plants (for example, for each member of a consolidated group by the common parent of the group, by the partnership (including a lower-tier 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.

(A) Time for making election. Except as provided in paragraph (f)(6) of this section, any election specified in paragraph (f)(3)(i) of this section must be made by the due date, including extensions, of the Federal tax return for the taxpayer’s taxable year that includes September 28, 2017.

(B) Manner of making election. Except as provided in paragraph (f)(6) of this section, any election specified in paragraph (f)(3)(i) of this section must be made in the manner prescribed on the 2017 Form 4562, “Depreciation and Amortization,” and its instructions. The election is made separately by each person owning qualified property (for example, for each member of a consolidated group by the common parent of the group, by the partnership (including a lower-tier partnership), or by the S corporation).

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

(B) Example 2. On January 5, 2018, XX purchased and placed in service qualified property for a total amount of $9,000. On August 20, 2018, XX transferred this qualified property to Partnership BC in a transaction described in section 721(a). No other partner of Partnership BC has ever had a depreciable interest in the qualified property. XX and Partnership BC are calendar-year taxpayers. Because the transaction between XX and Partnership BC is a transaction described in section 168(i)(7), pursuant to paragraph (g)(1)(iii) of this section, the 100-percent additional first year depreciation deduction allowable for the qualified property is allocated between XX and Partnership BC in accordance with the rules in §1.168(d)-1(b)(7)(ii) for allocating the depreciation deduction between the transferor and the transferee. Accordingly, the 100-percent additional first year depreciation deduction allowable of $9,000 for the qualified property for 2018 is allocated between XX and Partnership BC based on the number of months that XX and Partnership BC held the qualified property in service during 2018. Thus, because the qualified property was held in service by XX for 7 of 12 months, which includes the month in which XX placed the qualified property in service but does not include the month in which the qualified property was transferred, XX is allocated $5,250 (7⁄12 × $9,000 additional first year depreciation deduction). Partnership BC is allocated $3,750, the remaining 5⁄12 of the $9,000 additional first year depreciation deduction allowable for the qualified property.

(A) Qualified property, except for computer software described in paragraph (b)(2)(i)(B) of this section, a qualified film or television production described in paragraph (b)(2)(i)(E) of this section, or a qualified live theatrical production described in paragraph (b)(2)(i)(F) of this section, is depreciated over the recovery period of the qualified property remaining as of the beginning of the taxable year in which the increase in basis occurs, and using the same depreciation method and convention applicable to the qualified property that applies for the taxable year in which the increase in basis occurs; and

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

(A) Qualified property, except for computer software described in paragraph (b)(2)(i)(B) of this section, a qualified film or television production described in paragraph (b)(2)(i)(E) of this section, or a qualified live theatrical production described in paragraph (b)(2)(i)(F) of this section, reduces the amount otherwise allowable as a depreciation deduction over the recovery period of the qualified property remaining as of the beginning of the taxable year in which the decrease in basis occurs, and using the same depreciation method and convention of the qualified property that applies in the taxable year in which the decrease in basis occurs. If, for any taxable year, the reduction to the amount otherwise allowable as a depreciation deduction, as determined under this paragraph (g)(2)(ii)(A), exceeds the total amount otherwise allowable as a depreciation deduction for all of the taxpayer's depreciable property, the taxpayer shall take into account a negative depreciation deduction in computing taxable income; and

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

(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.

(A) Example 1.

(B) Example 2.

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

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

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

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

(E) Time of disposition has the same meaning as that term is defined in §1.168(i)-6(b)(3) for relinquished MACRS property. For relinquished computer software, time of disposition is when the disposition of the relinquished computer software takes place under the convention determined under §1.167(a)-14(b).

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

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

(H) Excess basis has the same meaning as that term is defined in §1.168(i)-6(b)(8) for replacement MACRS property. For replacement computer software, the excess basis is any excess of the basis in the replacement computer software, as determined under section 1031(d) and §1.1031(d)-1, 1.1031(d)-2, 1.1031(j)-1, or 1.1031(k)-1; or section 1033(b) and §1.1033(b)-1, over the exchanged basis as determined under paragraph (g)(5)(ii)(G) of this section.

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

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

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

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

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

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

(A) In general. If the replacement MACRS property or the replacement computer software, as applicable, meets the original use requirement in paragraph (b)(3)(ii) of this section and all other requirements of section 168(k) and this section, the remaining exchanged basis for the year of replacement and the remaining excess basis, if any, for the year of replacement for the replacement MACRS property or the replacement computer software, as applicable, are eligible for the additional first year depreciation deduction under this section. If the replacement MACRS property or the replacement computer software, as applicable, meets the used property acquisition requirements in paragraph (b)(3)(iii) of this section and all other requirements of section 168(k) and this section, only the remaining excess basis for the year of replacement for the replacement MACRS property or the replacement computer software, as applicable, is eligible for the additional first year depreciation deduction under this section. See paragraph (b)(3)(iii)(A)(3) of this section. The additional first year depreciation deduction applies to the remaining exchanged basis and any remaining excess basis, as applicable, of the replacement MACRS property or the replacement computer software, as applicable, if the time of replacement is after September 27, 2017, and before January 1, 2027; or, in the case of replacement MACRS property or replacement computer software, as applicable, described in section 168(k)(2)(B) or (C), the time of replacement is after September 27, 2017, and before January 1, 2028. The additional first year depreciation deduction is computed separately for the remaining exchanged basis and any remaining excess basis, as applicable.

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

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

(D) Effect of §1.168(i)-6(i)(1) election. If a taxpayer properly makes the election under §1.168(i)-6(i)(1) not to apply §1.168(i)-6 for any MACRS property, as defined in §1.168(b)-1(a)(2), involved in a like-kind exchange or involuntary conversion, then:

(E) Alternative minimum tax. The additional first year depreciation deduction is allowed for alternative minimum tax purposes for the year of replacement of replacement MACRS property or replacement computer software, as applicable, that is qualified property. If the replacement MACRS property or the replacement computer software, as applicable, meets the original use requirement in paragraph (b)(3)(ii) of this section and all other requirements of section 168(k) and this section, the additional first year depreciation deduction for alternative minimum tax purposes is based on the remaining exchanged basis and the remaining excess basis, if any, of the replacement MACRS property or the replacement computer software, as applicable, for alternative minimum tax purposes. If the replacement MACRS property or the replacement computer software, as applicable, meets the used property acquisition requirements in paragraph (b)(3)(iii) of this section and all other requirements of section 168(k) and this section, the additional first year depreciation deduction for alternative minimum tax purposes is based on the remaining excess basis, if any, of the replacement MACRS property or the replacement computer software, as applicable, for alternative minimum tax purposes.

(A) The time of replacement for purposes of this paragraph (g)(5) is when the replacement MACRS property or replacement computer software, as applicable, is placed in service by the taxpayer, provided the threat or imminence of requisition or condemnation of the involuntarily converted MACRS property or involuntarily converted computer software, as applicable, existed before January 1, 2027, or, in the case of property described in section 168(k)(2)(B) or (C), existed before January 1, 2028; and

(B) The taxpayer depreciates the replacement MACRS property or replacement computer software, as applicable, in accordance with paragraph (e) of this section. However, at the time of disposition of the involuntarily converted MACRS property, the taxpayer determines the exchanged basis, as defined in §1.168(i)-6(b)(7), and the excess basis, as defined in §1.168(i)-6(b)(8), of the replacement MACRS property and begins to depreciate the depreciable exchanged basis, as defined in §1.168(i)-6(b)(9), of the replacement MACRS property in accordance with §1.168(i)-6(c). The depreciable excess basis, as defined in §1.168(i)-6(b)(10), of the replacement MACRS property continues to be depreciated by the taxpayer in accordance with the first sentence of this paragraph (g)(5)(iv)(B). Further, in the year of disposition of the involuntarily converted MACRS property, the taxpayer must include in taxable income the excess of the depreciation deductions allowable, including the additional first year depreciation deduction allowable, on the unadjusted depreciable basis of the replacement MACRS property over the additional first year depreciation deduction that would have been allowable to the taxpayer on the remaining exchanged basis of the replacement MACRS property at the time of replacement, as defined in paragraph (g)(5)(iv)(A) of this section, plus the depreciation deductions that would have been allowable, including the additional first year depreciation deduction allowable, to the taxpayer on the depreciable excess basis of the replacement MACRS property from the date the replacement MACRS property was placed in service by the taxpayer, taking into account the applicable convention, to the time of disposition of the involuntarily converted MACRS property. Similar rules apply to replacement computer software.

(A) Example 1.

(B) Example 2.

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

(D) Example 4.

(E) Example 5.

(F) Example 6.

(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 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. See §1.168(i)-4(b)(1) for determining the depreciable basis of the property at the time of conversion 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 income-producing 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 27, 2017, and converted by the taxpayer from personal use to business or income-producing use by January 1, 2027. See paragraph (b)(3)(ii) of this section relating to the original use rules for a conversion of property to business or income-producing use. See §1.168(i)-4(b)(1) for determining the depreciable basis of the property at the time of conversion to business or income-producing use.

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

(B) If depreciable property is not qualified 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 in the taxable year of the change in use.

(A) Example 1.

(B) Example 2.

(A) With respect to the portion of the basis of the qualified rehabilitated building that is attributable to the qualified rehabilitation expenditures if the taxpayer makes the applicable election under paragraph (f)(1)(i) of this section not to deduct any additional first year depreciation for the class of property that includes the qualified rehabilitation expenditures; or

(B) With respect to the portion of the remaining rehabilitated basis of the qualified rehabilitated building that is attributable to the qualified rehabilitation expenditures if the taxpayer claims the additional first year depreciation deduction on the unadjusted depreciable basis, as defined in §1.168(b)-1(a)(3) but before the reduction in basis for the amount of the rehabilitation credit, of the qualified rehabilitation expenditures; and the taxpayer depreciates the remaining adjusted depreciable basis, as defined in paragraph (e)(2)(i) of this section, of such expenditures using straight line cost recovery in accordance with section 47(c)(2)(B)(i) and §1.48-12(c)(7)(i). For purposes of this paragraph (g)(9)(i)(B), the remaining rehabilitated basis is equal to the unadjusted depreciable basis, as defined in §1.168(b)-1(a)(3) but before the reduction in basis for the amount of the rehabilitation credit, of the qualified rehabilitation expenditures that are qualified property reduced by the additional first year depreciation allowed or allowable, whichever is greater.

(A) Between February 8, 2023, and June 4, 2023, JM, a calendar-year taxpayer, incurred qualified rehabilitation expenditures of $200,000 with respect to a qualified rehabilitated building that is nonresidential real property under section 168(e). These qualified rehabilitation expenditures are qualified property and qualify for the 20-percent rehabilitation credit under section 47(a)(1). JM’s basis in the qualified rehabilitated building is zero before incurring the qualified rehabilitation expenditures and JM placed the qualified rehabilitated building in service in July 2023. JM depreciates its nonresidential real property placed in service in 2023 under the general depreciation system of section 168(a) by using the straight line method of depreciation, a 39-year recovery period, and the mid-month convention. JM elected to use the optional depreciation tables to compute the depreciation allowance for its depreciable property placed in service in 2023. Further, for 2023, JM did not make any election under paragraph (f) of this section.

(B) Because JM did not make any election under paragraph (f) of this section, JM is allowed an 80-percent additional first year depreciation deduction of $160,000 for the qualified rehabilitation expenditures for 2023 (the unadjusted depreciable basis of $200,000 (before reduction in basis for the rehabilitation credit) multiplied by 0.80). JM also is allowed to claim a rehabilitation credit of $8,000 for the remaining rehabilitated basis of $40,000 (the unadjusted depreciable basis (before reduction in basis for the rehabilitation credit) of $200,000 less the additional first year depreciation deduction of $160,000, multiplied by 0.20 to calculate the rehabilitation credit). For 2023, the ratable share of the rehabilitation credit of $8,000 is $1,600. Further, JM's depreciation deduction for 2023 for the remaining adjusted depreciable basis of $32,000 (the unadjusted depreciable basis (before reduction in basis for the rehabilitation credit) of $200,000 less the additional first year depreciation deduction of $160,000 less the rehabilitation credit of $8,000) is $376.64 (the remaining adjusted depreciable basis of $32,000 multiplied by the depreciation rate of 0.01177 for recovery year 1, placed in service in month 7).

(A) Depreciable property acquired after September 27, 2017, by the taxpayer and placed in service by the taxpayer during a taxable year ending on or after September 28, 2017;

(B) A specified plant for which the taxpayer properly made an election to apply section 168(k)(5) and that is planted, or grafted to a plant that was previously planted, after September 27, 2017, by the taxpayer during a taxable year ending on or after September 28, 2017; and

(C) Components acquired or self-constructed after September 27, 2017, of larger self-constructed property described in paragraph (c)(2) of this section and placed in service by the taxpayer during a taxable year ending on or after September 28, 2017.