IRS Explains How to Take PATH Act Depreciation Deductions

In Rev. Proc. 2016-48, the IRS issued guidance for taxpayers to take advantage of a number of tax provisions that had expired at the end of 2014 but were retroactively extended to the beginning of 2015 in December 2015. Specifically, the procedure addresses Sec. 179 expensing, bonus depreciation, and the election to take a credit against alternative minimum tax (AMT) liability in lieu of bonus depreciation for “round 5 extension property.”

Sec. 179 permits a deduction for the cost of certain property placed in service during the tax year. The higher limits on this deduction ($500,000 expensing limit and $2 million phaseout threshold) were perpetually in danger of expiring as Congress did not make them permanent until it enacted the Protecting Americans From Tax Hikes (PATH) Act of 2015, Division Q of the Consolidated Appropriations Act, 2016, P.L. 114-113. The PATH Act also retroactively reinstated the $250,000 limit on qualified real property for 2015.

Bonus depreciation, which permits taxpayers to elect to take a current deduction of a percentage (currently 50%) of the cost of property for the year it was placed in service had also expired, but it was not made permanent by the PATH Act. It was extended to property placed in service before 2020 (and 2021 for certain property) and retroactively to property placed in service before 2016 (2017 for certain property). A related provision allows taxpayers to elect to forgo bonus depreciation and instead claim an AMT credit.

Because the PATH Act was enacted after many taxpayers had filed their 2014 returns, they may not know how to take advantage of these tax changes. The revenue procedure provides the procedures taxpayers must follow.

For Sec. 179, the revenue procedure explains how taxpayers should treat a disallowed deduction for qualified real property. A taxpayer that treated the amount of a 2010, 2011, 2012, 2013, or 2014 disallowed Sec. 179 deduction for qualified real property as property placed in service on the first day of the taxpayer’s last tax year beginning in 2014 may either continue its treatment of that property or, if the Sec. 6501(a) period is open, amend its federal tax return for the last tax year beginning in 2014 to carry over the 2010, 2011, 2012, 2013, or 2014 disallowed Sec. 179 deduction to any tax year beginning in 2015. However, if the taxpayer’s last tax year beginning in 2014 is open under Sec. 6501(a) and an affected succeeding tax year is closed, the taxpayer must continue to treat the amount of a 2010, 2011, 2012, 2013, or 2014 disallowed Sec. 179 deduction as property placed in service on the first day of the taxpayer’s last tax year beginning in 2014.

For bonus depreciation, the revenue procedure applies to a taxpayer that did not claim the 50% additional first-year depreciation for some or all qualified property placed in service after Dec. 31, 2014, on its tax return for the tax year beginning in 2014 and ending in 2015 or on its return for a short tax year of less than 12 months beginning and ending in 2015. The procedure explains what these taxpayers should do, depending on the choices they make regarding bonus depreciation.

Finally, the revenue procedure explains how taxpayers may elect to not take bonus depreciation for round 5 extension property (property eligible for bonus depreciation solely due to the provisions of the PATH Act) and increase their AMT credit limitation in lieu of the bonus depreciation. It also explains how taxpayers can elect to take bonus depreciation for round 5 property and not increase the AMT credit limitation. The procedure warns taxpayers that they must make either election in the first tax year ending after Dec. 31, 2014, even if they do not place any round 5 property in service in that year, if they wish to apply the election to property placed in service in a subsequent year.