SECTION 2. BACKGROUND

.01 Modifications to § 179 . (1) Section 179(a) allows a taxpayer to elect to treat the cost (or a portion of the cost) of any § 179 property as an expense for the taxable year in which the taxpayer places the property in service. Section 179(b)(1) and (2) prescribe a dollar limitation on the aggregate cost of § 179 property that can be treated as an expense under § 179(a). The dollar limitation is the amount under § 179(b)(1) (the § 179(b)(1) limitation), reduced (but not below zero) by the amount by which the cost of § 179 property placed in service during the taxable year exceeds the amount under § 179(b)(2) (the § 179(b)(2) limitation). For taxable years beginning after 2014, the § 179(b)(1) limitation is $500,000 and the § 179(b)(2) limitation is $2,000,000. Pursuant to § 179(b)(6), these limitation amounts are adjusted for inflation for taxable years beginning after 2015. For taxable years beginning in 2016, section 3.03 of Rev. Proc. 2016–14, 2016–9 I.R.B. 365, provides that the § 179(b)(1) limitation and the § 179(b)(2) limitation, adjusted for inflation, are $500,000 and $2,010,000, respectively. For taxable years beginning in 2017, section 3.25 of Rev. Proc. 2016–55, 2016–45 I.R.B. 707, provides that the § 179(b)(1) limitation and the § 179(b)(2) limitation, adjusted for inflation, are $510,000 and $2,030,000, respectively.

(2) Section 179(b)(3)(A) provides that a taxpayer’s § 179 deduction for any taxable year, after application of the § 179(b)(1) and (2) limitations, is limited to the taxpayer’s taxable income for that taxable year that is derived from the taxpayer’s active conduct of any trade or business during that taxable year (taxable income limitation). Section 179(b)(3)(B) provides that the amount of any cost of § 179 property elected to be expensed in a

taxable year that is disallowed as a § 179 deduction under the taxable income limitation may be carried forward for an unlimited number of years and may be deducted under § 179(a) in a future year, subject to the same limitations.

(3) If a taxpayer elects to apply § 179(f), § 179(f)(1) provides that § 179 property includes qualified real property, as defined in § 179(f)(2). Prior to amendment by the PATH Act, § 179(f) applied to qualified real property placed in service in any taxable year beginning in 2010, 2011, 2012, 2013, or 2014. Section 124(c)(1) of the PATH Act extended the application of § 179(f) to qualified real property placed in service in any taxable year beginning after 2009 and before 2016. As a result of the amendment by § 124(c)(1) of the PATH Act, § 179(f)(3) provided that the maximum amount of qualified real property that may be expensed under § 179(a) for any taxable year beginning after 2009 and before 2016 was $250,000. Further, § 179(f)(4) provided that, notwithstanding § 179(b) (3)(B), a taxpayer that elected to apply § 179(f) and elected to expense under § 179(a) the cost (or a portion of the cost) of qualified real property placed in service during any taxable year beginning after 2009 and before 2016 could not carry over to any taxable year beginning after 2015 the amount of any cost of such property that was disallowed as a § 179 deduction under the taxable income limitation of § 179(b)(3)(A). To the extent that any § 179 deduction attributable to qualified real property was not allowed to be carried over to a taxable year beginning after 2015, that amount was required to be treated as an amount for which an election under § 179 was not made and as property placed in service on the first day of the taxpayer’s last taxable year beginning in 2015 for purposes of computing depreciation. Rev. Proc. 2016–48, 2016–37 I.R.B. 348, provides guidance under § 124(c)(1) of the PATH Act.

Section 124(c)(2) of the PATH Act further amends § 179(f) by making permanent the treatment of qualified real property as § 179 property if the taxpayer elects to apply § 179(f). Section 124(c)(2) of the PATH Act also amends § 179(f) by striking paragraphs (3) and (4). Section 124(g)(2) of the PATH Act provides that

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the amendments made by § 124(c)(2) of the PATH Act apply to taxable years beginning after December 31, 2015. Section 3.01 of this revenue procedure addresses the application of these revised rules.

(4) Section 179(c) provides the rules for making and revoking elections under § 179 (§ 179 election). Pursuant to § 179(c)(1), a § 179 election is made in the manner prescribed by regulations. Prior to amendment by § 124(d) of the PATH Act, § 179(c)(2) provided that a § 179 election for taxable years beginning after 2002 and before 2015 may be revoked by the taxpayer with respect to any § 179 property. Section 1.179–5(c)(1) of the Income Tax Regulations provides that for any taxable year beginning after 2002 and before 2008, a taxpayer is permitted to make or revoke a § 179 election without the consent of the Commissioner on an amended Federal tax return for that taxable year. Section 1.179–5(c) was promulgated in 2005 and has not been amended to reflect the extensions of § 179(c)(2) to taxable years beginning before 2015. However, in 2008, the Treasury Department and the IRS issued Rev. Proc. 2008–54, 2008–2 C.B. 722. Section 7 of Rev. Proc. 2008–54 provides that for a taxable year beginning after 2007 and before the last year provided in § 179(c)(2) for revoking a § 179 election by a taxpayer for any § 179 property, the taxpayer will be permitted to make a § 179 election on an amended return for that taxable year without the Commissioner’s consent. Section 7 of Rev. Proc. 2008–54 further provides that until § 1.179–5(c) is amended to incorporate this guidance, taxpayers may rely on such guidance.

Section 124(d) of the PATH Act amends § 179(c)(2) to make permanent the permission granted to a taxpayer to revoke a § 179 election for any § 179 property without the Commissioner’s consent. This amendment applies to taxable years beginning after 2014. As a result, some taxpayers are uncertain about whether a § 179 election for taxable years beginning after 2014 may be made on an amended Federal tax return without the Commissioner’s consent. Section 3.02 of this revenue procedure provides the rules for making such a § 179 election.

(5) Section 179(d)(1) defines the term “§ 179 property.” Prior to amendment by

the PATH Act, § 179(d)(1) defined § 179 property as property that is: (A)(i) tangible property to which § 168 applies, or (ii) computer software, as defined in § 197(e)(3)(B), that is described in § 197(e)(3)(A)(i), to which § 167 applies, and that is placed in service in a taxable year beginning after 2002 and before 2015; (B) § 1245 property, as defined in § 1245(a)(3); and (C) acquired by purchase for use in the active conduct of a trade or business. Prior to amendment by the PATH Act, § 179(d)(1) further provided that § 179 property does not include any property described in § 50(b) and does not include air conditioning or heating units.

Section 124(b) of the PATH Act amends § 179(d)(1)(A)(ii) to make permanent the treatment of computer software, as defined in § 197(e)(3)(B), that is described in § 197(e)(3)(A)(i), to which § 167 applies, as § 179 property. This amendment applies to taxable years beginning after 2014. Section 124(e) of the PATH Act also amends § 179(d)(1) to allow air conditioning or heating units to be § 179 property. This amendment applies to taxable years beginning after 2015. Some taxpayers have inquired about what types of air conditioning or heating units qualify as § 179 property. Section 3.03 of this revenue procedure addresses this issue.

.02 Modifications to § 168(k) . (1) Prior to amendment by the PATH Act, § 168(k)(1) allowed a 50-percent additional first year depreciation deduction for qualified property that, as provided by § 168(k)(2)(A), was acquired by a taxpayer after 2007 and placed in service by the taxpayer before 2015 (before 2016 in the case of property described in § 168(k)(2)(B) or (C)). Section 143(a)(1) of the PATH Act amends § 168(k)(2)(A) by extending the placed-in-service date to before 2016 (before 2017 in the case of property described in § 168(k)(2)(B) or (C)), and extending other dates in § 168(k)(2) by changing “January 1, 2015” each place it appears to “January 1, 2016.” Rev. Proc. 2016–48 provides guidance under § 143(a)(1) of the PATH Act.

(2) Section 143(b)(1) of the PATH Act further amends § 168(k)(2) by extending

the placed-in-service date to before 2020 (before 2021 in the case of property described in § 168(k)(2)(B) or (C)), and by modifying the definition of qualified property. As amended by § 143(b)(1) of the PATH Act, qualified property under § 168(k)(2)(A) includes property that is qualified improvement property instead of qualified leasehold improvement property. The term “qualified improvement property” is defined in § 168(k)(3), as amended by § 143(b)(2) of the PATH Act. Further, qualified property no longer has to meet the acquisition date requirements in § 168(k)(2)(A)(iii) as in effect before the enactment of the PATH Act. Section 143(b)(1) of the PATH Act also modifies the property described in § 168(k)(2)(B) and (C), including by imposing a new acquisition date requirement, and modifies the special rules under § 168(k)(2)(E) by deleting the related party rules in § 168(k)(2)(E)(iv) that were in effect before the enactment of the PATH Act.

Section 143(b)(5) of the PATH Act amends § 168(k) by adding § 168(k)(6) to the Code. It provides that the additional first year depreciation deduction percentage of 50 percent is phased down beginning for qualified property placed in service after December 31, 2017 (after December 31, 2018, for property described in § 168(k)(2)(B) or (C)). The percentage is 40 percent for qualified property placed in service in 2018 (in 2019 for property described in § 168(k)(2)(B) or (C), determined by substituting “2019” for “2020” in § 168(k)(2)(B)(i)(III) and (ii), and § 168(k)(2)(E)(i)), and is 30 percent for qualified property placed in service in 2019 (in 2020 for property described in § 168(k)(2)(B) or (C)).

Section 143(b)(6)(D) of the PATH Act further amends § 168(k) by adding § 168(k)(7) to the Code. It allows a taxpayer to elect not to deduct additional first year depreciation for any class of property placed in service by the taxpayer in the same taxable year. This election is similar to the election provided under § 168(k) (2)(D)(iii) as in effect before the enactment of the PATH Act.

Pursuant to § 143(b)(7)(A) of the PATH Act, these amendments apply to property placed in service after December 31, 2015. Sections 4.01 through 4.04 of

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this revenue procedure address the application of these revised rules.

(3) Section 143(b)(4) of the PATH Act also amends § 168(k) by adding § 168(k)(5) to the Code. It 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 § 263A(e)(4). If the taxpayer makes this election, the additional first year depreciation deduction is allowable for any specified plant for the taxable year in which that specified plant is planted or grafted and that specified plant is not treated as qualified property under § 168(k) in the plant’s placed-inservice year. The percentage of the additional first year depreciation deduction is (i) 50 percent for any specified plant planted or grafted after 2015 and before 2018, (ii) 40 percent for any specified plant planted or grafted during 2018, and (iii) 30 percent for any specified plant planted or grafted during 2019.

A specified plant is defined in § 168(k)(5)(B) as (i) any tree or vine that bears fruits or nuts, and (ii) any other plant that will have more than one yield of fruits or nuts and that generally has a preproductive 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.

Section 143(b)(7)(C) of the PATH Act provides that § 168(k)(5) applies to specified plants, as defined in § 168(k)(5)(B), planted or grafted after December 31, 2015. Section 4.05 of this revenue procedure provides procedures for making the election to apply § 168(k)(5) (§ 168(k)(5) election). The Treasury Department and IRS understand that some taxpayers are uncertain as to whether, if such election is made for a specified plant, a § 179 election for the specified plant in its placed-inservice year is based on the adjusted basis of the specified plant, or on the original cost of the specified plant by recapturing the additional first year depreciation deduction. To address this uncertainty, section 4.05 of this revenue procedure also clarifies how the

§ 168(k)(5) election interacts with the § 179 election.

.03 Modification to § 168(j) . (1) Section 168(j) provides that for purposes of § 168(a), the applicable recovery period for qualified Indian reservation property is determined in accordance with the table contained in § 168(j)(2) instead of the table contained in § 168(c). The term “qualified Indian reservation property” is defined in § 168(j)(4). Section 168(j) does not apply to property placed in service after December 31, 2016.

(2) Section 167(b) of the PATH Act amends § 168(j) by redesignating paragraph (8), as amended by § 167(a) of the PATH Act, as paragraph (9), and by adding new paragraph (8). New § 168(j)(8) allows a taxpayer to elect not to apply § 168(j) for all property that is in the same class of property and placed in service in the same taxable year (the § 168(j)(8) election). Once made, this election is irrevocable. Section 167(c)(2) of the PATH Act provides that the amendments made by § 167(b) of the PATH Act apply to taxable years beginning after December 31, 2015. Section 5 of this revenue procedure provides the procedures for making the § 168(j)(8) election.

.04 Subsequent References . Unless otherwise specifically stated, all references in the subsequent sections of this revenue procedure to § 168(k), § 168(j), and § 179 are to § 168(k), § 168(j), and § 179 as in effect after the enactment of the PATH Act.