The IRS has issued guidance which clarifies the application of several changes made to the expensing allowance under Code Sec. 179 as well as the Code Sec. 168(k) bonus depreciation deduction by the Protecting Americans From Tax Hikes Act of 2015 (PATH Act) (P.L. 114-113).
Code Sec. 179
Although the PATH deleted a provision in Code Sec. 179(d), which provided that air conditioning and heating units do not qualify for expensing, effective for property placed in service in tax years beginning after 2015, the IRS guidance clarifies that taxpayers may only expense air conditioning and heating units that qualify as Code Sec. 1245 property, such as portable air conditioning and heating units. However, if a component of a central air conditioning or heating system of a building is qualified real property, as defined in Code Sec. 179(f)(2), and the component is placed in service in a tax year beginning after 2015, the component can qualify for expensing if the taxpayer elects to treat its qualified real property as section 179 property.
The PATH Act amended Code Sec. 179(c)(2)) to make permanent the allowing a taxpayer to revoke a Code Sec. 179 election without IRS consent. This amendment applies to taxable years beginning after 2014. The guidance clarifies that a Code Sec. 179 election may be made for tax years beginning after 2014 on an amended return for the tax year in which the section 179 property is placed in service without IRS consent. The IRS will amend Reg. §1.179-5(c) to reflect this guidance.
The following clarifications relate to amendments made by the PATH Act to the Code Sec. 168(k) bonus depreciation provision:
Qualified improvement property. Qualified improvement property (QIP) placed in service after 2015 is eligible for bonus depreciation. In general QIP is an improvement to the interior portion of a building that is nonresidential real property if the improvement is placed in service after the date the building was “first placed in service” (Code Sec. 168(k)(3), as amended by the PATH Act). The IRS clarifies that the term “first placed in service” means that first time the building was placed in service by any taxpayer. Several examples illustrate that so long as an improvement, including a “build out,” is placed in service after the building is placed in service (e.g, even one-day later), the improvement can qualify for bonus depreciation.
The rules of Reg. §1.168(k)-1(c), relating to the former qualified leasehold improvement category of bonus depreciation property, may generally be applied to qualified improvement property.
Qualified restaurant improvements that are eligible for a 15-year recovery period under Code Sec. 168(e)(7)) are eligible for bonus depreciation if they also meets the definition of qualified improvement property. Restaurant buildings do not qualify for bonus depreciation.
Election out of bonus depreciation and alternative minimum tax. Under the PATH Act, even though a taxpayer elects out of bonus depreciation for a class of property (e.g., MACRS 5-year property), the property retains its status as “qualified property” under “Code Sec. 168(k)”. As a result, depreciation deductions are not subject to alternative minimum tax depreciation adjustment even though the election out is made. This rule does not apply to property placed in service before 2016 for which an election out was made. In the case of a 2015/2016 fiscal-year tax year, property in a class for which an election out was made is subject to an AMT adjustment if placed in service in 2015 and property placed in service in 2016 in a class for which an election out is made is not subject to the adjustment. Both before and after the PATH Act, no AMT adjustment is required on property for which bonus depreciation is claimed.
Long-production property and noncommercial aircraft. Clarifications to the acquisition date requirements for long-production property and noncommercial aircraft that are eligible for a one-year placed-in-service deadline extension are provided. Such property must be acquired before January 1, 2020, or acquired pursuant to a binding contract entered into before January 1, 2020. Rules similar to those provided in Reg. §1.168(k)-1(b)(4) will apply for purposes of determining if the acquisition date requirement is met. With respect to noncommercial aircraft, the nonrefundable deposit requirement of Code Sec. 168(k)(2)(C)(iii) will be considered satisfied if the purchaser at the time of the purchase contract, has made a nonrefundable deposit of at least the lesser of 10 percent of the cost of the aircraft or $100,000.
Under the PATH Act the bonus depreciation rate is generally 40 percent for property placed in service in 2018 and 30 percent for property placed in service in 2019. Thereafter, the bonus deduction expires. The guidance clarifies the application of the bonus phaseout to long production property and noncommercial aircraft which qualify for a one-year extended placed-in-service deadline.
Specified plants. Guidance was provided for making an election to claim bonus depreciation on specified plants in the tax year of planting or grafting, as described in Code Sec. 168(k)(5). A 2015/2016 fiscal-year taxpayer who planted or grafted a specified plant in 2016 will be treated as having made a valid election if bonus depreciation was claimed on the plant on the taxpayer’s return and the taxpayer does not revoke this deemed election as provided in the IRS guidance. Bonus depreciation claimed on a specified plant reduces its basis for purposes of calculating the section 179 deduction.
Indian reservation property. The time and manner for making the election under Code Sec. 168(j)(8) not to use the shortened recovery periods otherwise applicable to qualified Indian reservation property are explained.
This IRS guidance on the effect of the PATH Act on bonus depreciation and the section 179 allowance is effective April 20, 2017. Section 7 of Rev. Proc. 2008-54, 2008-2 CB 722, is obsoleted for tax years beginning after 2014.
Rev. Proc. 2017-33, 2017FED ¶46,273
Code Sec. 179
CCH Reference – 2017FED ¶12,126.35
CCH Reference – 2017FED ¶12,126.50
CCH Reference – 2017FED ¶12,126.65
Code Sec. 168
CCH Reference – 2017FED ¶11,279.19
Tax Research Consultant
CCH Reference – TRC DEPR: 3,600
CCH Reference – TRC DEPR: 12,154
CCH Reference – TRC DEPR:12,200.20