Tax Equity News

Bonus depreciation proposed regulations: Leasing to a utility

Posted by David Burton

June 24, 2020

Posted in Power Renewable energy Solar Wind Blog article


The IRS issued proposed regulations covering a number of issues under section 168(k) of the Internal Revenue Code (the "Code").[1] The 2018 regulations were intended to clarify bonus depreciation deduction rules enacted by the Tax Cuts and Jobs Act.[2] Under the Tax Cuts and Jobs Act (the "TCJA"), the additional first-year depreciation deduction is increased from 50% to 100% for taxpayers who acquired qualified property after September 27, 2017 and before January 1, 2023.[3] As the result, certain taxpayers may deduct the entire cost of qualified property in the year in which it is placed in service. Revisions to the 2018 regulations were published on September 24, 2019 to reflect comments.[4]

This is the first of a series of blog posts describing the effect of the updated proposed regulations on transactions related to (1) property leased to regulated utilities (described in Part 1 of the series); (2) floor plan financing (described in Part 2 of the series); and (3) previously-owned property (described in Part 3 of the series).

Property leased to regulated utilities

During the legislative process for tax reform in 2017, public utilities agreed to be ineligible for the bonus depreciation tax deduction in exchange for exclusion from the interest deduction limitation rules that were codified in section 163(j) of Code by the TCJA.[5] Following enactment of the TCJA, tax advisors were left with a question of whether a leasing company that leased bonus depreciation eligible equipment to a public utility could claim bonus depreciation with respect to that equipment. The new proposed regulations take a view that a lessor can claim bonus depreciation on eligible property, notwithstanding the property is leased to (and used by) a public utility so long as the lessor is not a public utility.[6] This conclusion is consistent with the guidance in the General Explanation of Public Law by the Joint Committee on Taxation (the "Blue Book") for the TCJA.[7]

The preamble to the new proposed regulations, however, does not reference the language in the Blue Book as a rationale for allowing bonus depreciation for lessors. Perhaps by not referring to the Blue Book, the Treasury and the Internal Revenue Service (the "IRS") intended to avoid the perception of giving weight to the Blue Book's guidance. Such approach is consistent with the United States v. Woods Supreme Court decision[8] and the IRS's general practice.[9] In Woods, the Supreme Court held the Blue Book is not considered legislative history entitled to deference in interpreting tax statutes because the Blue Book is "commentary" and not considered by members of Congress in voting for legislation.[10]

Instead of referencing the Blue Book, the preamble to the proposed regulations offers macroeconomic rationale for allowing a lessor to claim bonus depreciation on eligible property that is leased to a public utility. The IRS observed "this decision allows businesses to receive some share of the economic benefit of section 168(k). To the extent lessors can claim bonus depreciation, it is plausible that the market-clearing lease price for such assets will fall, potentially enabling some expansions of output and contributing to economic growth."[11] It is unclear, however, whether the reference "businesses to receive some share of the economic benefit"[12] was intended to include manufacturers of equipment, benefiting from increased product demand, regulated utilities, benefiting from reduced cost of rent, or both.

Special thanks to law clerk Natalia Muzlayev, who works under the supervision of David Burton, for her assistance in the preparation of this content.


[9] In a database search, we found only a few occasions when the IRS referred to the Blue Book in its preamble to the regulations before the Woods was decided and no such references post the Woods Supreme Court decision. See e.g., Prop. Regs. § 1.263A, 59 Fed. Reg. 39,958 (1994).

[12] Id.

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