SECTION 4. ADDITIONAL FIRST

YEAR DEPRECIATION (§ 168(k))

.01 Qualified Property .

(1) In general . The rules for determining whether depreciable property is eligible for the additional first year depreciation deduction under § 168(k) are similar to the rules in § 168(k) as in effect before the enactment of the PATH Act. However, qualified property under § 168(k) (2)(A) includes property that is qualified improvement property instead of qualified leasehold improvement property. Further, the acquisition date requirement in

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§ 168(k)(2)(A)(iii) and the related party rules in § 168(k)(2)(E)(iv), both as in effect before the enactment of the PATH Act, do not apply. However, a new acquisition date requirement applies for property described in § 168(k)(2)(B) or (C).

(2) Property described in § 168(k) (2)(B) or (C) .

(a) Acquisition date requirement . Qualified property includes any property described in § 168(k)(2)(B) or (C). Pursuant to § 168(k)(2)(B)(i)(III) and (C)(i), property is described in § 168(k)(2)(B) or (C) if the property is acquired by the taxpayer before January 1, 2020, or is acquired pursuant to a written contract entered into before January 1, 2020, assuming all other requirements in § 168(k)(2)(B) or (C), as applicable, are met. To determine if the acquisition date requirement is met, rules similar to the rules in § 1.168(k)–1(b)(4) for “qualified property” or for “30-percent additional first year depreciation deduction” apply. However, in applying § 1.168(k)– 1(b)(4), § 1.168(k)–1(b)(4)(ii)(A)–(D) and (iv) do not apply.

(b) Certain aircraft . For aircraft described in § 168(k)(2)(C), the nonrefundable deposit requirement in § 168(k) (2)(C)(iii) is satisfied if the purchaser, at the time of the purchase contract, has made a nonrefundable deposit of at least the lesser of 10 percent of the cost of the aircraft or $100,000. See section 5.02 of Rev. Proc. 2008–54.

(3) Application of § 1.168(k)–1 . For purposes of the additional first year depreciation deduction, rules similar to the rules in § 1.168(k)–1 for “qualified property” or for “30-percent additional first year depreciation deduction” apply to § 168(k)(2) and (3). However, in applying § 1.168(k)– 1(d)(1)(i), the computation of the allowable 50-percent additional first year depreciation deduction is made in accordance with the rules for 50-percent bonus depreciation property and, in applying § 1.168(k)– 1(f)(5)(iii)(A), the rules for 50-percent additional first year depreciation deduction apply. In applying § 1.168(k)–1(c) to qualified improvement property, see section 4.02(3) of this revenue procedure.

.02 Qualified Improvement Property .

(1) In general . Section 168(k)(3) defines the term “qualified improvement property” as any improvement to an inte

rior portion of a building that is nonresidential real property if the improvement is placed in service after the date the building was first placed in service. However, qualified improvement property does not include any improvement attributable to the enlargement of the building, any elevator or escalator, or the internal structural framework of the building.

(2) Building was first placed in service . For purposes of § 168(k)(3), the term “first placed in service” means the first time the building is placed in service by any person. See § 1.168(k)–1(c)(1)(iii). A building is first placed in service when first placed in a condition or state of readiness and availability for a specifically assigned function, whether in a trade or business, in the production of income, in a tax-exempt activity, or in a personal activity. See § 1.46–3(d)(1)(ii) and (d)(2).

(3) Application of § 1.168(k)–1(c) . Rules similar to the rules in § 1.168(k)– 1(c) apply to depreciable property that is qualified improvement property. However, in applying § 1.168(k)–1(c), § 1.168(k)–1(c)(2)(iii), (3)(ii), and (3)(vi) do not apply.

(4) Qualified restaurant property . Qualified property that is placed in service by the taxpayer after December 31, 2015, and that meets the definition of both qualified improvement property and qualified restaurant property, as defined in § 168(e)(7), is eligible for the additional first year depreciation deduction under § 168(k), assuming all other requirements in § 168(k) are met.

(5) Examples . The following examples illustrate the provisions concerning qualified improvement property. Assume that all of the improvements in the examples are required to be capitalized under § 263(a) and/or § 263A.

(a) Example 1 – Qualified improvement property . In 2010, A places in service a new office building. In February 2016, A sells this office building to B at fair market value. B uses the office building in its trade or business. In March 2016, B begins to construct improvements to the interior portion of the office building and places the improvements in service in December 2016. Because the office building was first placed in service in 2010 and the improvements made by B to the interior portion of the office building are placed in service after that date, the improvements that are § 1250 property are qualified improvement property, assuming all other requirements in § 168(k)(3) and § 1.168(k)–1(c), taking into account section 4.02(3) of this revenue procedure, are met.

(b) Example 2 – Qualified improvement property . In 2015, C, a corporation and manufacturer, enters into a written contract with X for X to construct a new building for use by C in its trade or business. The building will house a manufacturing operation and office space. The initial construction plans did not include a private restroom for the owner of C . During the construction of the building, C enters into a written contract with Y to construct a private restroom in the new building for the owner of C . On May 27, 2016, C places in service the building, except for the private restroom. On May 28, 2016, the private restroom in the building for the owner of C is placed in service. Because the building is first placed in service on May 27, 2016, and the private restroom is placed in service on May 28, 2016, the assets in the private restroom that are § 1250 property are qualified improvement property, assuming all other requirements in § 168(k)(3) and § 1.168(k)– 1(c), taking into account section 4.02(3) of this revenue procedure, are met.

(c) Example 3 – Qualified improvement property . The facts are the same as in Example 2, except C enters into an amendment to the existing written contract with X, the contractor of the building, for X to construct a private restroom in the building for the owner of C . Because the building is first placed in service on May 27, 2016, and the private restroom is placed in service on May 28, 2016, the result is the same as in Example 2 .

(d) Example 4 – Qualified improvement property . D is engaged in the commercial building rental business. In March 2015, D enters into a written contract with Z to construct a multi-story building. Pursuant to this contract, Z constructs a completely finished exterior of the building and a minimally finished interior of the building with only elevators, heating, ventilation, and air conditioning systems, plumbing, restrooms, and concrete floors. In December 2015, D and E entered into a lease agreement providing that E will lease one floor of the new building and E will install on that floor drop ceilings, lighting, interior walls, electrical outlets, carpeting, and trade fixtures necessary for the operation of E ’s trade or business (collectively referred to as a build-out). On February 8, 2016, D places in service the new building. On June 4, 2016, E places in service the build-out. Because the building is first placed in service on February 8, 2016, and the build-out is placed in service after that date, the assets of the build-out that are § 1250 property are qualified improvement property, assuming all other requirements in § 168(k)(3) and § 1.168(k)–1(c), taking into account section 4.02(3) of this revenue procedure, are met. (e) Example 5 – Qualified restaurant property that is qualified improvement property . In 2016, F constructs and places in service an improvement to a restaurant building and that improvement meets the definitions of both qualified restaurant property under § 168(e)(7) and qualified improvement property under § 168(k)(3). Accordingly, the improvement is eligible for the additional first year depreciation deduction provided by § 168(k), assuming all other requirements in § 168(k) are met.

(f) Example 6 – Qualified restaurant property that is not qualified improvement property . In 2016, G constructs and places in service a new restaurant building and that building meets the definition of

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qualified restaurant property under § 168(e)(7). However, that building is not qualified improvement property under § 168(k)(3). Accordingly, the building is not eligible for the additional first year depreciation deduction provided by § 168(k).

.03 Phase Down of Additional First Year Depreciation Deduction Percentage .

(1) In general . Pursuant to § 168(k)(6), 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 tables below provide the additional first year depreciation deduction percentages for qualified property placed in service by the taxpayer after 2015.

(2) Additional first year depreciation deduction percentages .

(a) The table below provides the additional first year depreciation deduction percentages for qualified property that is not described in § 168(k)(2)(B) or (C):

Additional First Year Depreciation

Placed-in-Service Year Deduction Percentage

2016 50%

2017 50%

2018 40%

2019 30%

After 2019 0%

(b) The table below provides the additional first year depreciation deduction percentages for qualified property that is described in § 168(k)(2)(B) or (C):

Placed-in-Service

Acquired, or Acquired Pursuant to a

Additional First Year Depreciation

Year Written Contract Entered Into: Deduction Percentage

2016 Before 2020 50%

2017 Before 2020 50%

2018 Before 2020 50%

2019 Before 2019 40%*

2019 During 2019 30%*

2020 Before 2020 30%**

2020 After 2019 0%

After 2020 Before 2020 or After 2019 0%

• For qualified property described in § 168(k)(2)(B) and placed in service in 2019 but acquired, or acquired pursuant to a written contract entered into, before 2019, the 40% applies only to the property’s unadjusted depreciable basis attributable to the property’s manufacture, construction, or production before January 1, 2019. See § 168(k)(2)(B)(ii) and (6)(A) and § 1.168(k)–1(d)(1)(ii), taking into account section 4.01(3) of this revenue procedure. For qualified property described in § 168(k)(2)(B), placed in service in 2019, and acquired, or acquired pursuant to a written contract entered into, in 2019, the 30% applies only to the property’s unadjusted depreciable basis attributable to the property’s manufacture, construction, or production before January 1, 2020. For qualified property described in § 168(k)(2)(C) and placed in service in 2019, the 30% and 40% apply to the property’s unadjusted depreciable basis.

** For qualified property described in § 168(k)(2)(B) and placed in service in 2020 but acquired, or acquired pursuant to a written contract entered into, before 2020, the 30% applies only to the property’s unadjusted depreciable basis attributable to the property’s manufacture, construction, or production before January 1, 2020. See § 168(k)(2)(B)(ii) and (6)(B) and § 1.168(k)–1(d)(1)(ii), taking into account section 4.01(3) of this revenue procedure. For qualified property described in § 168(k)(2)(C) and placed in service in 2020 but acquired, or acquired pursuant to a written contract entered into, before 2020, the 30% applies to the property’s unadjusted depreciable basis.

Year

Written Contract Entered Into:

.04 Election Not to Deduct the Additional First Year Depreciation .

(1) In general . The rules for making the election under § 168(k)(7) not to de

duct the additional first year depreciation (the § 168(k)(7) election) are similar to the rules for making such election under § 168(k)(2)(D)(iii) as in effect before the enactment of the PATH Act. As a result,

the § 168(k)(7) election applies to all qualified property that is in the same class of property and placed in service in the same taxable year. If the § 168(k)(7) election is made for a class of property that is

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qualified property placed in service during the taxable year, no additional first year depreciation deduction is allowable for that property and § 168(k)(2)(F) does not apply to that property. However, that property is still qualified property for purposes of § 168(k), assuming all the requirements of § 168(k)(2) are met. For example, if a calendar-year taxpayer makes the § 168(k)(7) election for a class of property that is qualified property placed in service during 2016, the depreciation adjustments under § 56 and the regulations under § 56 do not apply to the property to which the election applies for purposes of computing the taxpayer’s alternative minimum taxable income. See § 168(k)(2)(G). However, see section 4.04(3) of this revenue procedure for how the election not to deduct the additional first year depreciation applies to a taxpayer with a taxable year beginning in 2015 and ending in 2016. (2) Application of § 1.168(k)–1(e) . Except as provided in section 4.04(3) of this revenue procedure, rules similar to the rules in § 1.168(k)–1(e)(2), (3), (5), and (7) apply for purposes of § 168(k)(7).

(3) Special rules for certain taxpayers . This section 4.04(3) applies to a taxpayer with a taxable year beginning in 2015 and ending in 2016. If such taxpayer makes an election not to deduct the additional first year depreciation for a class of property that is qualified property placed in service during such taxable year, no additional first year depreciation deduction is allowable for that property and § 168(k)(2)(F), as in effect before and after the enactment of the PATH Act, does not apply to that property. The election is made under § 168(k)(2)(D)(iii) as in effect before the enactment of the PATH Act for property placed in service in 2015 and under § 168(k)(7) for property placed in service in 2016. For property placed in service in 2015 to which the election applies, the depreciation adjustments under § 56 and the regulations under § 56 apply to such property for purposes of computing the taxpayer’s alternative minimum taxable income. See § 1.168(k)–1(e)(6). For qualified property placed in service in 2016 to which the election applies, the depreciation adjustments under § 56 and the regulations under § 56 do not apply to such property for purposes of computing the

taxpayer’s alternative minimum taxable income. See § 168(k)(2)(G).

.05 Special Rules for Certain Plants Bearing Fruits and Nuts .

(1) Section 168(k)(5) election .

(a) In general . The § 168(k)(5) election applies to one or more specified plants, as defined in § 168(k)(5)(B), planted or grafted by the taxpayer during the taxable year for which the § 168(k)(5) election is made. If a taxpayer makes the § 168(k)(5) election for a specified plant, (i) the additional first year depreciation deduction provided by § 168(k) is allowed for that specified plant for regular tax and alternative minimum tax purposes for the taxable year in which the specified plant is planted or grafted by the taxpayer, (ii) that specified plant is not treated as qualified property under § 168(k) in its placed-inservice year, and (iii) the depreciation deductions under § 168 for that specified plant, after deducting the additional first year depreciation, are allowed for its placed-inservice year and subsequent taxable years. Further, pursuant to § 263A(c)(7) (as added to the Code by § 143(b)(6)(H) of the PATH Act), § 263A does not apply to any amount deducted under the § 168(k)(5) election.

(b) Time and manner for making the § 168(k)(5) election.

(i) In general . Except as provided in section 4.05(1)(b)(ii) of this revenue procedure, the § 168(k)(5) election must be made by the due date, including extensions, of the Federal tax return for the taxable year in which the taxpayer plants or grafts the specified plant to which the election applies. Except as provided in section 4.05(1)(b)(ii) of this revenue procedure, the § 168(k)(5) election must be made in the manner prescribed on Form 4562, Depreciation and Amortization, and its instructions.

(ii) Deemed election . This section 4.05(1)(b)(ii) applies to a taxpayer that did not make the § 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 taxable year beginning in 2015 and ending in 2016 or its taxable year of less than 12 months beginning and ending in 2016. If this section 4.05(1)(b)(ii) applies, the taxpayer will be treated as making the

§ 168(k)(5) election for that specified plant if the taxpayer:

(A) On that return, deducted the 50-percent additional first year depreciation for that specified plant; and

(B) Did not revoke the deemed election provided under this section 4.05(1)(b)(ii) within the time and in the manner provided in section 4.05(2)(b) of this revenue procedure.

(2) Revocation of the § 168(k)(5) elec- tion .

(a) In general . Except as provided in section 4.05(2)(b) of this revenue procedure, the § 168(k)(5) election, once made, may be revoked only with the written consent of the Commissioner. To seek the Commissioner’s consent, the taxpayer must submit a request for a letter ruling pursuant to Rev. Proc. 2017–1, 2017–1 I.R.B. 1 (or successor).

(b) Automatic 6-month extension . If a taxpayer made, or would be treated under section 4.05(1)(ii) of this revenue procedure as having made, the § 168(k)(5) election for a specified plant, an automatic extension of 6 months from the due date, excluding extensions, of the taxpayer’s Federal tax return for the taxable 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 6-month extension period, the taxpayer, and all taxpayers whose tax liability would be affected by the § 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.

(3) Interaction with § 179 . If a taxpayer makes the § 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 § 168(k), whichever is greater. This remaining adjusted basis is the cost of the specified plant for purposes of § 179, before the application of § 179(d)(3) and § 1.179– 4(d).