REG-106808-19 (TCJA Component Election Proposed Regs)

Where this comes from

T.D. 9874 finalized the first round of TCJA bonus regulations. But one big issue remained: what happens when a large building under construction has components that were acquired or started at different times?

On the same day T.D. 9874 was issued, the IRS also released REG-106808-19 at 84 Fed. Reg. 50130. This second set of proposed rules tackled the component election and several other issues T.D. 9874 did not fully address.

What it proposed

The key proposal was the component election. When a taxpayer is constructing a large property, individual components of that property can be treated as separately acquired. Each component's bonus rate is determined by when that component was acquired, not when the whole building was placed in service.

This matters when a construction project spans a date where the bonus rate changed. Components acquired before the rate change date and components acquired after it can each use the applicable rate for their own acquisition date.

The proposed rule also included a de minimis exception for used property, so a small amount of prior-use property would not disqualify an otherwise new acquisition, and special partnership anti-abuse rules.

What it does not mean

This proposed rule was superseded by T.D. 9916, which adopted the component election with modifications. The final rules in T.D. 9916 control for property at issue after those regulations were effective.

The component election also has conditions and requirements. Using it incorrectly, or without documenting the components and their acquisition dates carefully, creates audit risk rather than reducing it. A qualified cost segregation study can identify the components and their dates, but the election mechanics require careful application.