IRS Guidance Clarifies Certain TCJA Property-Related Changes

(Parker Tax Publishing January 2019)

The IRS clarified, and provided additional guidance with respect to, certain provisions involving amendments by the Tax Cuts and Jobs Act of 2017 relating to (1) the modification of the definition of qualified real property that qualifies as Code Sec. 179 property eligible for expensing; (2) the modification of depreciation rules under Code Sec. 168 which require certain property held by an electing real property trade or business to be depreciated under the alternative depreciation system (ADS), as well as changes to the recovery period under ADS from 40 to 30 years for residential rental property; and (3) the requirement under Code Sec. 168 that certain property held by an electing farming business be depreciated under ADS. The revenue procedure also modifies Rev. Proc. 87-57 to provide an optional depreciation table for residential rental property depreciated under ADS with a 30-year recovery period. Rev. Proc. 2019-8.

Background

The Tax Cuts and Jobs Act of 2017 (TCJA) -

(1) amended Code Sec. 179 by modifying the definition of qualified real property that may be eligible as Code Sec. 179 property under Code Sec. 179(d)(1);

(2) amended Code Sec. 168 by (i) requiring certain property held by an electing real property trade or business, as defined in Code Sec. 163(j)(7)(B), to be depreciated under the alternative depreciation system (ADS) in Code Sec. 168(g), and (ii) changing the recovery period under ADS from 40 to 30 years for residential rental property; and

(3) amended Code Sec. 168 by requiring certain property held by an electing farming business to be depreciated under the alternative depreciation system.

In response to practitioners' questions involving these amendments, the IRS issued Rev. Proc. 2019-8.

TCJA Changes to Code Section 179

TCJA amended the definition of Code Sec. 179 property to provide that, at the taxpayer's election, Code Sec. 179 property may include qualified real property as defined in Code Sec. 179(f). The TCJA also amended Code Sec. 179(d)(1) to allow property used predominantly to furnish lodging or in connection with the furnishing of lodging as described in Code Sec. 50(b)(2) to be Code Sec. 179 property. These amendments apply to property placed in service in tax years beginning after December 31, 2017.

Before amendment by the TCJA, Code Sec. 179(f)(2) defined "qualified real property" as meaning qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property described in Code Sec. 168(e)(6), Code Sec. 168(e)(7), and Code Sec. 168(e)(8), respectively, as in effect on December 26, 2017. TCJA amended Code Sec. 179(f) by defining qualified real property as (1) any qualified improvement property described in Code Sec. 168(e)(6), and (2) any of the following improvements to nonresidential real property placed in service after the date such property was first placed in service: roofs; heating, ventilation, and air-conditioning property; fire protection and alarm systems; and security systems. These amendments apply to property placed in service in tax years beginning after December 31, 2017. Subsequent to the enactment of TCJA, the Consolidated Appropriations Act, 2018 removed Code Sec. 179(e), which provided special rules for qualified disaster assistance property, and redesignated Code Sec. 179(f) as Code Sec. 179(e).

In response to inquiries relating to the correct procedures to use in electing to treat qualified real property as Code Sec. 179 property, Rev. Proc. 2019-8 provides that a taxpayer may elect to expense under Code Sec. 179(a) the cost, or a portion of the cost, of qualified real property placed in service by the taxpayer during any tax year beginning after 2017 by filing an original or amended federal tax return for that tax year in accordance with procedures similar to those in Reg. Sec. 1.179-5(c)(2) and Section 3.02 of Rev. Proc. 2017-33. If a taxpayer elects or elected to expense under Code Sec. 179(a) a portion of the cost of qualified real property placed in service by the taxpayer during any tax year beginning after 2017, the taxpayer can increase the portion of the cost of such property expensed under Code Sec. 179(a) by filing an amended federal tax return for that tax year.

TCJA Changes to Code Section 168(g)

Before TCJA, depreciation was determined under ADS for: (1) any tangible property that during the tax year is used predominantly outside the United States; (2) any tax-exempt use property; (3) any tax-exempt bond financed property; (4) any imported property covered by an Executive order under Code Sec. 168(g)(6); and (5) any property to which an election under Code Sec. 168(g)(7) applied. TCJA amended Code Sec. 168(g)(1) to require ADS to be used for the following additional property: (1) nonresidential real property, residential rental property, and qualified improvement property held by an electing real property trade or business as defined in Code Sec. 163(j)(7)(B), and (2) any property with a recovery period of 10 years or more that is held by an electing farming business as defined in Code Sec. 163(j)(7)(C). These amendments apply to tax years beginning after December 31, 2017, without regard to when the property is or was placed in service.

As a result of these changes, some electing real property trades or businesses and electing farming businesses questioned how depreciation is changed from the general depreciation system under Code Sec. 168(a) to ADS under Code Sec. 168(g) for property placed in service in tax years beginning before 2018. In Rev. Proc. 2019-8, Section 4.02, the IRS outlines the procedures that an electing real property trade or business or an electing farming business must take under code Sec. 163(j)(7)(B) or Code Sec. 163(j)(7)(C), respectively, must take in changing depreciation of property to the alternative depreciation system. Rev. Proc. clarifies that such a change is not a change in method of accounting but is, instead, a change in use. Thus, there is no Code Sec. 481 adjustment that must be taken into income. However, if an electing real property trade or business or an electing farming business fails to change to make the change to ADS, then that trade or business has adopted an impermissible method of accounting for that item of property. As a result, a change from that impermissible method of accounting to the straight-line method, the applicable recovery period, and/or the applicable convention under the ADS for that item of MACRS property is a change in method of accounting subject to adjustments under Code Sec. 481.

Additionally, before amendment by the TCJA, the table of recovery periods under Code Sec. 168(g)(2)(C) provided that the recovery period was 40 years for residential rental property. TCJA amended that table by providing that the recovery period is 30 years for residential rental property. This amendment applies to property placed in service after December 31, 2017. Some practitioners inquired whether residential rental property placed in service before 2018 has a recovery period of 30 or 40 years under ADS. In Rev. Proc. 2019-8, the IRS advised that the recovery period under the table in Code Sec. 168(g)(2)(C) is 40 years for residential rental property placed in service by the taxpayer before 2018.

New Optional Depreciation Table under ADS

Rev. Proc. 87-57 contains optional depreciation tables that may be used by certain taxpayers in lieu of computing depreciation deductions in the manner otherwise described in Rev. Proc. 87-57. The optional depreciation tables specify schedules of annual depreciation rates to be applied to the unadjusted basis of the property in each tax year. If a taxpayer uses an optional depreciation table to compute the annual depreciation deduction for any item of property, the taxpayer must use the table to compute the annual depreciation deductions for the entire recovery period of such property. However, a taxpayer may not continue to use the table if there are any adjustments to the basis of such item of property for reasons other than (1) depreciation allowed or allowable, or (2) an addition or an improvement to such property that is subject to depreciation as a separate item of property.

The IRS had not previously published an optional table for property depreciated under ADS with a recovery period of 30 years and the mid-month convention. Some practitioners requested the IRS to provide an optional depreciation table for residential rental property that is placed in service after December 31, 2017, and depreciated under ADS using the straight-line method, the new 30-year recovery period required by the TCJA, and the mid-month convention. As a result, the IRS has provided such an optional depreciation table in Rev. Proc. 2019-8.

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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