What are the requirements for property to be treated as qualified property if it has been in service less than one year?
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To determine whether property that has been in service for less than one year qualifies as "qualified property" for purposes such as bonus depreciation under section 168(k), the following requirements must be met:
1. Description of Qualified Property
- The property must be depreciable under section 167.
- It must be MACRS property (i.e., tangible, depreciable property placed in service after December 31, 1986, and subject to section 168).
- The property must have a recovery period of 20 years or less, or be certain computer software, water utility property, or qualified improvement property.
2. Original Use Requirement
- The original use of the property must commence with the taxpayer. "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.
- If the property is new and the taxpayer is the first to place it in service, the original use requirement is met.
- If the property is reconditioned or rebuilt, the cost of the reconditioned or rebuilt property does not satisfy the original use requirement unless the cost of used parts is not more than 20% of the total cost of the property.
- If the taxpayer acquires new property for personal use and then converts it to business use in the same or a subsequent taxable year, the taxpayer is considered the original user at the time of conversion, provided all other requirements are met.
3. Acquisition Requirement
- The property must be acquired by the taxpayer after the relevant date (for recent years, after September 27, 2017, for 100% bonus depreciation), and not pursuant to a binding contract in effect before that date.
- For self-constructed property, the taxpayer must begin manufacturing, constructing, or producing the property after the relevant date.
- The property must not be acquired from a related party as defined in section 267(b) or 707(b).
4. Placed-in-Service Requirement
- The property must be placed in service by the taxpayer in the tax year for which the deduction is claimed.
- "Placed in service" means the property is ready and available for a specific use in the taxpayer’s trade or business or for the production of income, even if it is not actually used yet.
5. No Disqualified Use or Transactions
- The property cannot be required to be depreciated under the Alternative Depreciation System (ADS) (e.g., property used predominantly outside the U.S., tax-exempt use property, etc.).
- The property cannot be acquired in a disqualified transaction, such as from a related party or under a binding contract in effect before the relevant date.
6. Not Disposed of in the Same Year
- The property must not be placed in service and disposed of in the same taxable year. If it is, bonus depreciation is not allowed.
7. Election Out
- The taxpayer must not have elected out of bonus depreciation for the class of property in the year placed in service.
8. Summary for Property in Service Less Than One Year
If property has been in service for less than one year, it can be treated as qualified property for bonus depreciation if:- It is new (or meets the original use rules for used property),- It was acquired and placed in service after the relevant date,- It is not required to use ADS,- It is not acquired from a related party or under a disqualified contract,- It is not disposed of in the same year,- The taxpayer has not elected out of bonus depreciation for that class of property,- And all other requirements above are met.
If these conditions are satisfied, the property is eligible for bonus depreciation in the year it is placed in service, even if it has been in service for less than one year.
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