ELFA Submits Comments to the Treasury Department on Proposed Regulations on 100% Expensing

On Aug. 8, the Treasury Department and the Internal Revenue Service published proposed rules regarding the application of new depreciation rules in the Federal Register. The proposed rules can be found at http://bit.ly/2OiTbed.

Earlier this spring ELFA requested guidance in three different areas: the application of 100% expensing to used equipment at the end of a lease; how the new rules apply to syndications; and record-keeping requirements. ELFA’s initial request for guidance can be found at http://bit.ly/2ImWrzT. The good news is that, based on our initial analysis, ELFA’s preferred outcome is enshrined in the proposed rules for the first two areas, and the third issue was left open.

In October, ELFA submitted comments on the draft rules. ELFA’s comments focused on several areas:

• Requesting a change in the regulations’ proposed treatment of sale-leasebacks when a lessee exercises an end-of-lease purchase option.
• Requesting guidance on how bonus depreciation is treated when leasing to several types of businesses that are prohibited from utilizing bonus depreciation.
• The Treasury request for input regarding a safe harbor.

ELFA’s comments can be found at www.elfaonline.org/advocacy/federal-issues.

End-of-Lease Treatment

The proposed regulations appear to appropriately address true leases by allowing a lessee to utilize 100% expensing, as long as they have never held a depreciable interest in that asset. Given the definition of “use” in the law, there was concern that a lessee that purchased equipment it had leased (i.e., equipment it had “used”) would not be able to claim bonus depreciation with respect to that equipment. Such a restriction would motivate lessees to purchase comparable used equipment from a third party, rather than the equipment they had leased. The regulations avoid that result by providing that a lessee is only deemed to have “used” leased equipment if the lessee had a depreciable interest in the equipment (which would not be the case under an ordinary true lease). This approach is consistent with the request for guidance submitted by ELFA. However, it does appear that a lessee exercising an end-of lease purchase option at the end of the lease portion of a sale-leaseback may not be eligible for bonus depreciation. ELFA has commented on this provision recommending an alternative path.

Leasing to Parties Ineligible for Bonus Depreciation

ELFA requested guidance from the Treasury Department regarding leasing to several categories of customers. These are customers that are specifically precluded from utilizing bonus depreciation themselves because they are certain public utilities, certain electing farms or certain companies that utilize floor-plan financing. ELFA noted that the exclusion from 100% bonus eligibility in the direct hands of a public utility was a clear trade-off for exclusion from the net interest expense limitations; however, lessors in all of these situations are subject to that net interest expense limitation, so the taxpayer claiming the 100% bonus would be subject to that related limitation. Accordingly, ELFA believes that guidance is warranted, making it clear that the owner of real property—the lessor in our member companies’ cases—is eligible for additional first-year depreciation absent a reason that the owner of the real property—the lessor—is otherwise exempted.

Record Keeping

Another issue that impacts leasing companies is tracking of property they owned previously, as previously-owned property is not bonus eligible. The proposed regulations did not answer that question, but the Treasury decision did request comments with respect to it. ELFA asks for a three-year limit on how far back in time a leasing company would have to track whether it owned an item of equipment.

The Treasury Department is likely in the process of reviewing all of the comments as this magazine hits your mailbox. It is unclear exactly when the final rules will be issued, but ELFA will stay on top of it and let members know when they are.