Additional Tax Guidance on Section 179 Expensing Allowance and Bonus Depreciation Under the Protecting Americans from Tax Hikes Act of 2015

DALLAS, April 28, 2017 /PRNewswire/ -- On April 21, 2017, the Internal Revenue Service (IRS) released Rev. Proc. 2017-33 to provide additional guidance for taxpayers regarding amendments made to expensing allowance in Section 179 and Section 168(k) bonus depreciation under the Protecting Americans from Tax Hikes (PATH) Act of 2015. 

Section 179

Under Sections 124(c)(2), (d), and (e) of the Path Act, the IRS amended the following:

• Made permanent the treatment of qualified real property as Section 179 property under Section 179(f),
• Made permanent the permission granted under Section 179(c)(2) to revoke without consent of the Commissioner of the Internal Revenue any election made under Section 179 and any specification contained in that election, and
• Allowed certain air conditioning or heating units to be eligible as Section 179 property under Section 179(d)(1).

The IRS clarifies in this revenue procedure that taxpayers may only expense air conditioning and heating units that qualify as Section 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 Section 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 guidance also clarifies that Section 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.

Bonus Depreciation

Under Section 143(b) of the Path Act, the IRS amended the following:

• Extended the placed-in-service date for property to qualify for the additional first-year depreciation deduction,
• Modified the definition of qualified property under Section 168(k)(2),
• Extended and modified the election under Section 168(k)(4) to increase the alternative minimum tax (AMT) credit limitation in lieu of the additional first-year depreciation deduction,
• Added Section 168(k)(5), which allows a taxpayer to elect to deduct the additional first-year depreciation for certain plants bearing fruits and nuts before such plants are placed in service,
• Added Section 168(k)(6), which provides a phase down of the additional first-year depreciation deduction percentage for future taxable years, and
• Added Section 168(k)(7), which allows a taxpayer to elect not to deduct additional first-year depreciation for any class of property. Section 167(b) of the PATH Act amends Section 168(j) by adding new Section 168(j)(8), which allows a taxpayer to elect not to apply Section 168(j) for any class of property.

Qualified Improvement Property

The IRS clarifies in this revenue procedure that the term "first placed in service" means the first time the building was placed in service by any taxpayer. This revenue procedure provides several examples to demonstrate that a qualified improvement is eligible for bonus depreciation as long as the improvement is placed in service after the building was placed in service. Qualified restaurant improvements are also eligible for bonus depreciation if they meet the definition of qualified improvement property.

Specified Plant

This revenue procedure provided guidance for making an election to claim bonus depreciation on one or more specified plants as defined in Section 168(k)(5)(B). The election is allowed for regular tax and AMT tax purposes for the specified plant. Section 263A does not apply to any amount deducted under the Section 168(k)(5) election. The election must be made on taxpayer's timely filed tax return, including extensions, in the taxable year in which the taxpayer plants or grafts the specified plant.

Long-Production Property and Noncommercial Aircraft

The IRS provided clarification to the acquisition date requirements for long-production property and noncommercial aircraft property. Long-production property and noncommercial aircraft are eligible for a one-year placed in service extension deadline, given such property is acquired before January 1, 2020 or is acquired pursuant to a written binding contract that was entered into before January 1, 2020, and assuming all other requirements in Section 168(k)(2)(B) or (C) are met.

Under Section 168(k)(2)(C), the nonrefundable requirement is satisfied by the purchaser if the deposit is the lesser of 10% of the cost of the aircraft or $100,000.

Indian Reservation Property

Section 5 of this revenue procedure provides the procedures for making the Section 168(j)(8) election for qualified Indian reservation property. Section 168(j)(8) allows a taxpayer to elect not to apply Section 168(j) for all property that is in the same class of property and placed in service in the same taxable year. If the taxpayer makes a Section 168(j)(8) election, it is irrevocable.

This revenue procedure does not reflect any proposed technical corrections to the PATH Act, nor does this revenue procedure provide guidance related to the extension and modification to increase the AMT credit limitation in lieu of the additional first-year depreciation deduction under Section 168(k)(4). The IRS will issue guidance related to Section 168(k)(4) under a separate revenue procedure.

This revenue procedure is effective April 20, 2017. Section 7 of Rev. Proc. 2008-20 CB722 is obsolete for tax years beginning after 2014.

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