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IRS Clarifies 2015 Changes to Section 179 Expensing and Bonus Depreciation
(Parker Tax Publishing May 2017)
In a new revenue procedure addressing certain provisions enacted in 2015, the IRS provides rules for making a Code Sec. 179 election on an amended return, clarifies how the Code Sec. 168(k)(5) election relating to additional depreciation for certain plants interacts with the Code Sec. 179 election; and discusses the types of air conditioning or heating units that qualify as Code Sec. 179 property. Rev. Proc. 2017-33.
Background
The Protecting Americans From Tax Hikes Act of 2015 (PATH Act) amended Code Sec. 179 by -
(1) making permanent the treatment of qualified real property as Section 179 property under Code Sec. 179(f);
(2) making permanent the permission granted under Code Sec. 179(c)(2) to revoke without IRS consent any election made under Code Sec. 179 and any specification contained in that election; and
(3) allowing certain air conditioning or heating units to be eligible as Code Sec. 179 property under Code Sec. 179(d)(1).
The PATH Act also amended Code Sec. 168(k) by (1) extending the placed-in-service date for property to qualify for the additional first year depreciation deduction; (2) modifying the definition of qualified property under Code Sec. 168(k)(2); (3) extending and modifying the election under Code Sec. 168(k)(4) to increase the alternative minimum tax (AMT) credit limitation in lieu of the additional first year depreciation deduction; and (4) adding Code Sec. 168(k)(5), which allows a taxpayer to elect to deduct the additional first year depreciation for certain plants.
The Path Act also added Code Sec. 168(k)(5), which allows a taxpayer to elect to deduct additional first year depreciation for any specified plant that is planted before January 1, 2020, or grafted before that date to a plant that has already been planted, by the taxpayer in the ordinary course of its farming business, as defined in Code Sec. 263A(e)(4). If the taxpayer makes this election, the additional first year depreciation deduction is allowable for any specified plant for the tax year in which that specified plant is planted or grafted and that specified plant is not treated as qualified property under Code Sec. 168(k) in the plant's placed-in-service year. The percentage of the additional first year depreciation deduction is (1) 50 percent for any specified plant planted or grafted after 2015 and before 2018; (2) 40 percent for any specified plant planted or grafted during 2018; and (3) 30 percent for any specified plant planted or grafted during 2019.
Code Sec. 168(k)(5)(B) defines a specified plant as (1) any tree or vine that bears fruits or nuts, and (2) any other plant that will have more than one yield of fruits or nuts and that generally has a pre-productive period of more than two years from the time of planting or grafting to the time at which such plant begins bearing fruits or nuts. The term "specified plant" does not include any property that is planted or grafted outside of the United States. Code Sec. 168(k)(5) applies to specified plants that are planted or grafted after December 31, 2015.
As a result of the above changes, practitioners questioned
(1) whether a Section 179 election could be made on an amended return without IRS consent;
(2) how the Code Sec. 168(k)(5) election relating to additional depreciation for certain plants interacted with the Code Sec. 179 election; and
(3) what types of air conditioning or heating units qualified as Code Sec. 179 property.
The IRS issued Rev. Proc. 2017-33, which is effective April 20, 2017, to address these questions.
Taxpayers Can Elect Section 179 on an Amended Tax Return Without IRS Consent
In Rev. Proc. 2017-33, the IRS provides that, for any tax year beginning after 2014, a taxpayer can make a Code Sec. 179 election with respect to any Section 179 property without the IRS's consent on an amended federal tax return for the tax year in which the taxpayer places in service the Section 179 property. The IRS said it is going to amend Reg. Sec. 1.179-5(c) to incorporate this guidance.
Interaction of Code Sections 168(k)(5) and 179
With respect to the interaction of Code Sec. 168(k)(5) and Sec. 179, Section 4.05 of Rev. Proc. 2017-33 provides that, if a taxpayer makes the Code Sec. 168(k)(5) election for a specified plant (1) the additional first year depreciation deduction provided by Code Sec. 168(k) is allowed for that specified plant for regular tax and alternative minimum tax purposes for the tax year in which the specified plant is planted or grafted by the taxpayer; (2) that specified plant is not treated as qualified property under Code Sec. 168(k) in its placed-in-service year, and (3) the depreciation deductions under Code Sec. 168 for that specified plant, after deducting the additional first year depreciation, are allowed for its placed-in-service year and subsequent tax years. Further, pursuant to Code Sec. 263A(c)(7), Code Sec. 263A does not apply to any amount deducted under the Code Sec. 168(k)(5) election.
Compliance Tip: The Code Sec. 168(k)(5) election must be made by the due date, including extensions, of the federal tax return for the tax year in which the taxpayer plants or grafts the specified plant to which the election applies. Generally, the election is made in the manner prescribed on Form 4562, Depreciation and Amortization, and its instructions. However, special procedures apply if the taxpayer did not make the Code Sec. 168(k)(5) election for a specified plant planted or grafted by the taxpayer after December 31, 2015, on its timely filed federal tax return for its tax year beginning in 2015 and ending in 2016 or its tax year of less than 12 months beginning and ending in 2016. In this case, the taxpayer is treated as making the election for that specified plant if the taxpayer (i) on that return, deducted the 50-percent additional first year depreciation for that specified plant; and (ii) did not revoke the deemed election provided under this provision within the time and in the manner described below.
Generally, the Code Sec. 168(k)(5) election, once made, may be revoked only with the written IRS consent. In order to obtain such consent, the taxpayer must submit a request for a letter ruling pursuant to Rev. Proc. 2017-1 (or successor). If a taxpayer made, or would be treated as having made, the Code Sec. 168(k)(5) election for a specified plant, an automatic extension of six months from the due date, excluding extensions, of the taxpayer's federal tax return for the tax year in which such specified plant is planted or grafted is granted to revoke that election, provided the taxpayer timely filed the taxpayer's federal tax return for that taxable year and, within this six-month extension period, the taxpayer, and all taxpayers whose tax liability would be affected by the Code Sec. 168(k)(5) election, files an amended federal tax return for that taxable year in a manner that is consistent with the revocation of the election.
If a taxpayer makes the Code Sec. 168(k)(5) election for a specified plant, the adjusted basis of that specified plant is reduced by the amount of the additional first year depreciation deduction allowed or allowable under Code Sec. 168(k), whichever is greater. This remaining adjusted basis is the cost of the specified plant for purposes of Code Sec. 179, before the application of Code Sec. 179(d)(3) and Reg. Sec. 1.179-4(d).
Air Conditioning or Heating Units That Qualify as Section 179 Property
In Rev. Proc. 2017-33, the IRS provides that an air conditioning or heating unit qualifies as Code Sec. 179 property if such unit is Code Sec. 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. The IRS cites 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, as units that may qualify as Section 179 property. Generally, an example of an air conditioning or heating unit that will not qualify as Section 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 Code Sec. 179 property if the taxpayer elects to apply Code Sec. 179(f).
For a discussion of property that qualifies for the Code Sec. 179 election, see Parker Tax ¶97,710. For a discussion of how the election is make, see Parker Tax ¶94,750.
Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.
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