722 / Is bonus depreciation available in situations involving a partnership buyout?
The proposed bonus depreciation regulations clarify when bonus depreciation will be available in the context of a partnership buyout. Availability under the regulations depends upon whether the partnership itself buys out the departing partner in a redemption-type buyout, or whether the individual partners buy out the partner in a cross-purchase type buyout.
If the partnership redeems the departing partner’s interest in partnership assets at a premium, so that the basis in the relevant assets increases, bonus depreciation is not available. This is because the IRS views a redemption-type buyout as a transaction in which the partnership previously had an interest in the assets in question, rendering the assets ineligible for used asset treatment under Section 168(k).
If the individual partners buy out the departing partner at a premium, resulting in an increase in basis, the “step up” in basis is eligible for bonus depreciation. This is because the IRS views each partner as owning a separate and divided interest in the partnership property owned by the partnership, so that one partner does not have a previously existing interest in another partner’s share of partnership assets.1
1. Prop. Treas. Reg. § 1.168(k)-2(b)(3)(iii)(D). See also IRC §§ 743, 734.
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