New guidance on applying PATH Act extenders
TAX ALERT |
The Protecting Americans from Tax Hikes (PATH) Act of 2015 extended many taxpayer-favorable depreciation provisions. However, the PATH Act enactment on Dec. 18, 2015, did not provide all taxpayers with the necessary time to properly apply the extended provisions. Rev. Proc. 2016-48 provides taxpayers procedural guidance for applying many tax-extender depreciation provisions to fiscal year returns or certain 2015 short period returns. The revenue procedure provides for current treatment, potential tax return amendments, or potential accounting method change to implement the extenders.
Section 179 carryover
Section 179 generally allows taxpayers to make an election to treat all or part of the cost of qualified real property up to $250,000 as an expense in the year the property is placed in service, rather than depreciating all or a portion of the asset. However, this elective expensing cannot place a taxpayer into a loss position for the year. If there is remaining deduction after taxable income has been reduced to zero (for 2010-2014 tax years), taxpayers are allowed to carryforward the unused deduction and apply it towards a subsequent year, subject to the general limitations of section 179. Prior to the PATH Act, taxpayers were not allowed to carry over the unused portion attributable to qualified real property to a taxable year beginning after 2014. If the taxpayer had unused carryovers, then the taxpayer was deemed to place the qualified real property into service on the first day of the taxpayer’s last taxable year beginning in 2014.
The PATH Act extended this carryover provision by one year to include 2015. Rev. Proc. 2016-48 now states that taxpayers may either continue this treatment into 2015, or file an amended tax return for the last taxable year beginning in 2014 (if the statute of limitations is still open) to properly apply this provision.
Retroactive 50 percent bonus depreciation
Since 2008, taxpayers have been deemed to take an accelerated bonus depreciation percentage on certain qualified assets placed in service in the tax year—most recently 50 percent of basis for 2014. The PATH Act retroactively extended bonus depreciation through 2019 (although it phases out from 50 percent to 30 percent over time). Certain fiscal year taxpayers whose tax year began in 2014 and ended in 2015, or certain taxpayers who filed a 2015 short taxable year return beginning and ending in 2015 (fiscal/short year) may not have properly applied the 50 percent bonus depreciation or affirmatively elected out of such depreciation. Rev. Proc. 2016-48 allows taxpayers who have already filed a return subsequent to the filing of the fiscal/short return to retroactively apply (or elect out of) bonus depreciation by filing a Form 3115, Application for Change in Accounting Method, within the first or second year subsequent to the fiscal/short year. If a taxpayer has not yet filed the return subsequent to the fiscal/short year, they may amend the fiscal/short year to properly apply (or elect out of) bonus depreciation.
Round 5 extension property
Section 168(k)(4) allows a C corporation or an S corporation to elect not to claim the additional first year depreciation deduction for eligible qualified property or extension property and instead increase certain credits. Eligible qualified property, or extension property, is considered Round 5 extension property and is defined as any of the following:
- Property acquired after March 31, 2008, and placed in service after Dec. 31, 2014, and before Jan. 1, 2016, that is not long production period or transportation property
- Long production period or transportation property acquired after March 31, 2008, and placed in service after Dec. 31, 2015, and before Jan. 1, 2017
- Certain aircraft acquired after March 31, 2008, and placed in service after Dec. 31, 2015, and before Jan. 1, 2017
This allows taxpayers to elect to accelerate alternative minimum tax credits in lieu of bonus depreciation on Round 5 extension property and provides numerous deemed elections in and out of this provision. For those taxpayers that elected Round 4 extension property, the taxpayer is deemed to have elected Round 5 extension property unless they have affirmatively elected out.
The procedural guidance in Rev. Proc. 2016-48 is welcomed to many taxpayers that were uncertain how to apply PATH Act tax extenders to their fiscal or short tax years beginning in 2014 and ending in 2015, or beginning and ending in 2015. While this guidance relates to specific depreciation provisions, taxpayers should consult their tax advisors to determine whether this guidance affects previously filed tax returns and the best way to proceed.