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IRS issues guidance on depreciation changes in PATH Act

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Tax Hot Topics: IRS issues guidance on depreciation changes in PATH ActThe IRS issued Rev. Proc. 2017-33 on April 20, which is the second of three pieces of guidance being issued with regard to modifications to bonus depreciation and Section 179 expensing by the Protecting Americans from Tax Hikes (PATH) Act of 2015. 

Congress modified and extended bonus depreciation through 2019 and made certain changes to Section 179 expensing. The IRS said that with regard to those statutory changes, the government anticipated issuing a trilogy of guidance that would provide (1) transition rules related to certain retroactive provisions of the PATH Act (Rev. Proc. 2016-48); (2) clarity with respect to modifications made to bonus depreciation and Section 179 expensing; and (3) rules regarding the extension and modification of the election under Section 168(k)(4) to accelerate alternative minimum tax (AMT) credits in lieu of bonus depreciation.

Rev. Proc. 2016-48 provides procedures for taxpayers to follow for either taking bonus depreciation or electing out of bonus depreciation and was issued because the PATH Act was enacted after many taxpayers had filed their income tax returns for the 2014 tax year. Similar to previous guidance issued when bonus depreciation had been retroactively extended, the Rev. Proc. provides taxpayers with several options on how to take depreciation deductions related to these assets, and includes a deemed election if certain requirements are met. That guidance also provides rules on the interplay between AMT and bonus depreciation for round 5 extension property.

Rev. Proc. 2017-33 is the second guidance item under the PATH Act. It is important to note that although technical corrections to the PATH Act were introduced in the House and Senate last year, this procedure does not reflect any of the proposed technical corrections.  

Under the PATH Act, qualified improvement property qualifies for bonus depreciation. Qualified improvement property includes any improvement to an 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. Qualified improvement property does not include any improvement attributable to the enlargement of the building, any elevator or escalator, or the internal structural framework of the building.

Rev. Proc. 2017-33 provides favorable examples related to qualified improvement property that illustrate an improvement may be classified as qualified improvement property as long as it is placed in service at least one day after the building is originally placed in service by any taxpayer. The improvements in the examples include a private restroom, a tenant build-out of an entire floor, and qualified restaurant property. The examples are intended to illustrate the definition of qualified improvement property and not whether property is considered placed in service.

With regard to adjustments to AMT, Rev. Proc. 2017-33 says that if a calendar-year taxpayer elects out of bonus depreciation for a class of property that is qualified property placed in service in 2016, there is no AMT adjustment under Section 56 for that property. For fiscal year filers, the depreciation adjustments under Section 56 apply to property placed in service in 2015 to which the election applies; however the deprecation adjustments under Section 56 do not apply to such property placed in service in 2016.

Regarding the phase-down of bonus depreciation, as outlined in the PATH Act, the revenue procedure provides tables, including one that outlines the special basis rules applicable to certain property with longer production periods, and certain aircraft.

The revenue procedure also describes the elections related to certain plants bearing fruits and nuts and qualified Indian reservation property. For the Section 168(k)(5) election allowing bonus deprecation for certain specified plants and the Section 168(j)(8) election to not apply Section 168(j) for the same class of qualified Indian reservation property, the guidance provides that each election must be made by the due date, including extensions of the federal income tax return, and the election must generally be made in the manner prescribed on the Form 4562, “Depreciation and Amortization.” The revenue procedure also provides for a deemed election related to Section 168(k)(5) or Section 168(j)(8) if certain requirements are met.

With respect to Section 179 elections made on amended returns, the PATH Act made permanent the rule that allows a taxpayer to make, revoke, or modify a Section 179 election without IRS consent. The procedure makes it clear that taxpayers are allowed to either make the election or revoke the election on an amended return.

Finally, the revenue procedure provides that portable air conditions and heaters that are Section 1245 property rather than structural components qualify as Section 179 property. A central air conditioning or heating system of a building will not qualify as Section 179 property unless the component meets the definition of qualified real property and the taxpayer elects to apply Section 179(f).

Contact:
Sharon Kay
Partner, Washington National Tax Office
T +1 202 861 4140

Ellen Martin
Partner, Washington National Tax Office
T +1 202 521 1558

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