IRS releases new guidance on certain PATH Act provisions
TAX ALERT |
In addition to extending many taxpayer-favorable depreciation provisions, the Protecting Americans from Tax Hikes (PATH) Act of 2015, made some notable changes to the section 179 and bonus depreciation rules and elections. Rev. Proc. 2017-33 provides taxpayers additional guidance on a few of these new provisions. The IRS did not include guidance on the updated and amended section 168(k)(4) election to increase the alternative minimum tax (AMT) credit limitation in lieu of bonus depreciation; however, it did note that the IRS and Treasury Department anticipate issuing guidance on those new rules in a separate revenue procedure.
Key provisions of Rev. Proc. 2017-33 include the following:
Electing section 179 on amended returns
For any taxable year beginning after 2014, section 3.02 of Rev. Proc. 2017-33 grants taxpayers the ability to make a section 179 election to expense qualifying property on an amended tax return without the consent of the commissioner.
This guidance is contrary to the existing provisions in Reg. section 1.179-5(c); however, the revenue procedure notes that the IRS intends to amend that regulation and allows taxpayers to rely on Rev. Proc. 2017-33 until that amended regulation is released.
Air conditioning and heating units expensing under section 179
Section 3.03 of Rev. Proc. 2017-33 clarifies the kinds of air conditioning and heating units that qualify for expensing under section 179. Two categories of units are identified:
- Section 1245 property, such as portable window air conditioners or plug-in heaters
- HVAC components that are qualified real property under section 179(f)(2); components identified by the revenue procedure include motors, compressors, pipes and ducts
Qualified improvement property under bonus depreciation
The PATH Act created a new category of property that qualifies for bonus depreciation: qualified improvement property (QIP). QIP is defined in section 168(k)(3) as an improvement (excluding enlargements, structural framework and elevators/escalators) to the interior portion of a nonresidential building, if the improvement is placed in service after the date the building was first placed in service.
In addition to clarifying how existing regulations will apply to the new property category, Rev. Proc. 2017-33 provides some examples that are helpful in clarifying the IRS’s interpretation of “placed in service after the date such building was first placed in service.” Examples 2 and 3 under section 4.02, paragraph (5), are based on a scenario where an improvement is placed in service just one day after the building is placed in service. In Example 2, the improvement is based on a separate contract made with a party other than the building’s contractor, and in Example 3, the improvement is based on an amendment made to the original construction contract. In both scenarios the IRS found that the improvement was QIP.
It is important to note, however, that in both of these scenarios the improvement was not part of the initial construction plans. The IRS did not address a scenario where the improvement was identified in the original contract as, for example, an optional feature to be agreed upon later or as a ‘second phase’ construction project.
Removal of the AMT depreciation adjustment upon electing out of bonus depreciation
Another, perhaps inadvertent, change the PATH Act made to the bonus depreciation rules was removing the requirement to recognize an AMT depreciation adjustment under section 56 due to a taxpayer electing out of bonus depreciation. After certain structural changes the PATH Act made to the bonus depreciation statute, the adjustment requirement is now based upon whether or not property would qualify for bonus depreciation, not whether that bonus depreciation was actually taken.
Section 4.04 of Rev. Proc. 2017-33 states that this was indeed the result of the PATH Act’s modifications and clarifies that, for fiscal year filers, this new rule applies to all qualified property placed in service after Jan. 1, 2016, and may be partially utilized on an entity’s return for its 2015-2016 fiscal year.
Special rule for certain plants bearing fruits and nuts
Under section 168(k)(5), taxpayers may elect to take bonus depreciation on certain specified plants in the year that the plant is first planted or grafted, rather than later when the plant reaches the point of productivity and is placed in service. Section 4.05 of Rev. Proc. 2017-33 provides that the time and manner of making that election is the time and manner prescribed by Form 4562, Depreciation and Amortization, and its instructions (which currently require a statement to be attached to the tax return).
The procedural guidance in Rev. Proc. 2017-33 provides helpful clarification for certain PATH Act changes to the section 179 expensing rules and the bonus depreciation rules. The above summary of this new guidance, however, is not exhaustive. Taxpayers should consult their tax advisors to determine what effects, if any, Rev. Proc. 2017-33 has on their particular tax issues.