PATH Act Update: Depreciation Provisions Clarified

This past April the IRS issued Revenue Procedure 2017-33 which provided additional guidance on several beneficial provisions of the Protecting Americans from Tax Hikes (PATH) Act of 2015. The most significant of these provisions relate to the ability to accelerate depreciation on certain real property assets as discussed below.

Prior to the PATH Act, the rules relating to Section 179 expensing were set to revert back to the pre-2004 annual expensing limitation of $25,000 as of January 1, 2015. The PATH Act not only permanently increased the annual expensing limitation to $500,000 but also permanently extended the election which allows taxpayers to include qualified leasehold improvement property as eligible property under Section 179(f). Rev. Proc. 2017-33 provided an additional benefit to these qualified leasehold improvements by removing the lower limitation of $250,000 of annual expensing on these costs.

Rev. Proc. 2017-33 provided additional guidance regarding certain heating or air conditioning units that are eligible for expensing under Section 179(d). The PATH Act, as originally passed, removed these costs from eligibility for expensing, but Rev. Proc. 2017-33 clarified which heating or air conditioning costs may be eligible. In addition, it clarified which portable units would qualify as Section 1245 property. Also, components of a central heating or air conditioning system may qualify if placed in service after December 31, 2015 and the property qualifies as eligible property under Section 179(f).

The PATH Act also introduced the concept of qualified improvement property (QIP) under Section 168(k)(2), which included improvements to the interior of nonresidential real property placed in service after the building was originally placed in service. The concept expands on the definition of qualified leasehold improvements (QLHI) by removing the requirements that the improvements must be made pursuant to a lease and that the building has been placed in service more than three years. Meeting the QLHI requirements qualifies the improvements for a favorable 15 year depreciable life compared to 39 years for QIP, but both improvements are eligible for bonus depreciation. Rev. Proc. 2017-33 clarifies that for purposes of QIP the improvement needs to be placed in service after the building was first placed in service. Therefore an improvement that is completed after the building was initially placed in service (even as little as one day!) is QIP eligible for bonus depreciation.

Additional highlights of Rev. Proc. 2017-33 include:

  • One year extension of placed-in-service dates for certain eligible property to claim bonus depreciation under Section 168(k)
  • Inclusion of certain plants bearing fruit and nuts before those plants are placed in service as eligible for bonus depreciation
  • Permanent ability to revoke the election to take Section 179 expense without IRS consent

And while all eyes are focused on potential tax reform in Washington D.C. this year, these provisions could have a significant impact on some taxpayers, so consult your (Perkins & Co) tax advisor today to see if there are any planning opportunities available as a result of this update.