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IRS explains PATH Act changes to expensing and bonus and Indian property depreciation

IRS has issued a Revenue Procedure which provides guidance with respect to the Protecting Americans for Tax Hikes Act of 2015 (PATH Act)’s amendments to (i) expensing § 179 property, (ii) the additional first-year depreciation deduction under Code Sec. 168(k), and (iii) the qualified Indian reservation property depreciation provision under Code Sec. 168(j).

Background—PATH Act changes to Code Sec. 179. Code Sec. 179(a) allows a taxpayer to elect to treat the cost (or a portion of the cost) of any § 179 property as an expense for the tax year in which the taxpayer places the property in service.Code Sec. 179(b)(1) and Code Sec. 179(b)(2) prescribe a dollar limitation on the aggregate cost of § 179 property that can be treated as an expense under Code Sec. 179(a). The dollar limitation is the amount under Code Sec. 179(b)(1) (the § 179(b)(1) limitation), reduced (but not below zero) by the amount by which the cost of § 179 property placed in service during the tax year exceeds the amount under Code Sec. 179(b)(2) (the § 179(b)(2) limitation).

Code Sec. 179(b)(3)(A) provides that a taxpayer’s Code Sec. 179 deduction for any tax year, after application of the § 179(b)(1) and § 179(b)(2) limitations, is limited to the taxpayer’s taxable income for that tax year that is derived from the taxpayer’s active conduct of any trade or business during that tax year (taxable income limitation).Code Sec. 179(b)(3)(B) provides that the amount of any cost of § 179 property elected to be expensed in a tax year that is disallowed as a Code Sec. 179 deduction under the taxable income limitation may be carried forward for an unlimited number of years.

If a taxpayer elects to apply Code Sec. 179(f), Code Sec. 179(f)(1) provides that § 179 property includes qualified real property. Sec. 124(c)(1) of the PATH Act extended the application of this rule to 2015, created a qualified real property limit of $250,000 for 2015, and provided that the above-described carryover didn’t apply to qualified real property placed in service before 2016.

Section 124(c)(2) of the PATH Act further amended Code Sec. 179(f) by making permanent the treatment of qualified real property as § 179 property if the taxpayer elects to apply Code Sec. 179(f). Section 124(c)(2) of the PATH Act also amended Code Sec. 179(f) by striking out the $250,000 rule and the no-carryover rule.

Section 124(e) of the PATH Act amended Code Sec. 179(d)(1) to allow air conditioning or heating units to be § 179 property. This amendment applies to tax years beginning after 2015.

Background—PATH Act changes to Code Sec. 168(k). Prior to amendment by the PATH Act, Code Sec. 168(k)(1) allowed a 50% additional first-year depreciation deduction for qualified property that, as provided by Code Sec. 168(k)(2)(A), was acquired by a taxpayer after 2007 and placed in service by the taxpayer before 2015 (before 2016 in the case of property described in Code Sec. 168(k)(2)(B) or Code Sec. 168(k)(2)(C) ).

The PATH Act amended Code Sec. 168(k)(2) by extending the placed-in-service date to before 2020 (before 2021 in the case of property described in Code Sec. 168(k)(2)(B) or Code Sec. 168(k)(2)(C) ), and by modifying the definition of qualified property. As amended by § 143(b)(1) of the PATH Act, qualified property under Code Sec. 168(k)(2)(A) includes property that is qualified improvement property instead of qualified leasehold improvement property.

The PATH Act also provides that the additional first-year depreciation deduction percentage of 50% is phased down beginning for qualified property placed in service after Dec. 31, 2017 (after Dec. 31, 2018, for property described in Code Sec. 168(k)(2)(B) or Code Sec. 168(k)(2)(C) ).

Background—PATH Act changes to Code Sec. 168(j). Code Sec. 168(j) provides that for purposes of Code Sec. 168(a), the applicable recovery period for qualified Indian reservation property is determined in accordance with the table contained in Code Sec. 168(j)(2) instead of the table contained in Code Sec. 168(c).

Code Sec. 168(j)(8), added by the PATH Act, allows a taxpayer to elect not to apply Code Sec. 168(j) for all property that is in the same class of property and placed in service in the same tax year (the § 168(j)(8) election).

Rev Proc explanation of Code Sec. 179 changes. The Rev Proc includes the following explanations of PATH Act Code Sec. 179 changes.

Qualified real property. For any tax year beginning after Dec. 31, 2015, the § 179(b)(1) limitation amount and the § 179(b)(2) limitation amount, and the Code Sec. 179(b)(3)(B) carryover rules apply to qualified real property placed in service by the taxpayer during that tax year, if the taxpayer elects to apply Code Sec. 179(f).

Air conditioning and heating units qualifying as Sec. 179 property. Except as provided at “If a component,” below, an air conditioning or heating unit qualifies as § 179 property if such unit is § 1245 property, depreciated under Code Sec. 168, acquired by purchase for use in the active conduct of the taxpayer’s trade or business, and placed in service by the taxpayer in a tax year beginning after 2015. For example, portable air conditioners, such as window air conditioning units, and portable heaters, such as portable plug-in unit heaters, that are placed in service by the taxpayer in a tax year beginning after 2015 may qualify as § 179 property.

Except as provided at “If a component,” below, an example of an air conditioning or heating unit that will not qualify as § 179 property is any component of a central air conditioning or heating system of a building, including motors, compressors, pipes, and ducts, whether the component is in, on, or adjacent to a building.

If a component of a central air conditioning or heating system of a building meets the definition of qualified real property, as defined in Code Sec. 179(f)(2), and the component is placed in service by the taxpayer in a tax year beginning after 2015, the component may qualify as § 179 property if the taxpayer elects to apply Code Sec. 179(f).

Rev Proc explanation of Code Sec. 168(k) changes. The Rev Proc includes the following explanations of PATH Act Code Sec. 168(k) changes:

Qualified property. The rules for determining whether depreciable property is eligible for the additional first-year depreciation deduction under Code Sec. 168(k) are similar to the rules in Code Sec. 168(k) as in effect before the enactment of the PATH Act. However, qualified property under Code Sec. 168(k)(2)(A) includes property that is qualified improvement property instead of qualified leasehold improvement property. Further, the acquisition date requirement in Code Sec. 168(k)(2)(A)(iii) and the related party rules in Code Sec. 168(k)(2)(E)(iv), both as in effect before the enactment of the PATH Act, do not apply. However, a new acquisition date requirement applies for property described in Code Sec. 168(k)(2)(B) or Code Sec. 168(k)(2)(C).

For example, to determine if the acquisition date requirement is met, rules similar to the rules in Reg. § 1.168(k)-1(b)(4) for “qualified property” or for “30 percent additional first year depreciation deduction” apply. However, in applying Reg. § 1.168(k)-1(b)(4), Reg. § 1.168(k)-1(b)(4)(ii)(A)-(D) and Reg. § 1.168(k)-1(b)(4)(iv) do not apply.

Phase down of 50% rate. The Rev Proc sets out rules for the phase out. For example, for qualified property described in Code Sec. 168(k)(2)(B) and placed in service in 2019 but acquired, or acquired pursuant to a written contract entered into, before 2019, the 40% rate applies only to the property’s unadjusted depreciable basis attributable to the property’s manufacture, construction, or production before Jan. 1, 2019. For qualified property described in Code Sec. 168(k)(2)(B), placed in service in 2019, and acquired, or acquired pursuant to a written contract entered into, in 2019, the 30% rate applies only to the property’s unadjusted depreciable basis attributable to the property’s manufacture, construction, or production before Jan. 1, 2020. For qualified property described in Code Sec. 168(k)(2)(C) and placed in service in 2019, the 30% and 40% apply to the property’s unadjusted depreciable basis.

Rev Proc explanation of election not to apply Code Sec. 168(j). The § 168(j)(8) election applies to all qualified Indian reservation property, as defined in Code Sec. 168(j)(4), that is in the same class of property and placed in service in the same tax year. If the § 168(j)(8) election is made for a class of property that is qualified Indian reservation property placed in service during the tax year, the applicable recovery period for that property for purposes of Code Sec. 168(a) is determined in accordance with the table contained in Code Sec. 168(c), and the depreciation adjustments under Code Sec. 56 and the regs under Code Sec. 56 apply to that property for purposes of computing the taxpayer’s alternative minimum taxable income. Once made, the § 168(j)(8) election is irrevocable.

The term “class of property” means each class of property described in the table contained in Code Sec. 168(j)(2) (for example, 3-year property).

References: For the Code Sec. 179 expensing election, see FTC 2d/FIN ¶  L-9900  et seq.; United States Tax Reporter ¶  1794  et seq. For first-year bonus depreciation, see FTC 2d/FIN ¶  L-9310  et seq.; United States Tax Reporter ¶  1684.025  et seq.

Rev Proc 2017-33, 2017-19 IRB