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. Sections 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 2017, the § 179(b)(1) limitation is $1,000,000 and the § 179(b)(2) limitation is $2,500,000. Pursuant to § 179(b)(6), these limitation amounts are adjusted for inflation for taxable years beginning after 2018. For taxable years beginning in 2019, section 3.26 of Rev. Proc. 2018–57, 2018–49 I.R.B. 827, provides that the § 179(b)(1) limitation is $1,020,000 and the § 179(b)(2) limitation is $2,550,000.

(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) 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. Section 1.179–5(c)(1) of the Income Tax Regulations provides the manner for making or revoking a § 179 election for any taxable year beginning after 2002 and before 2008. Section 1.179–5(c) was promulgated in 2005 and has not been amended to reflect subsequent amendments to § 179(c). However, in 2017, the Treasury Department and the IRS issued Rev. Proc. 2017–33, 2017–19 I.R.B. 1236. Section 3.02 of Rev. Proc. 2017–33 provides that for a taxable year beginning after 2014, the taxpayer will be permitted to make a § 179 election for any § 179 property without the Commissioner’s consent on an amended federal tax return for the taxable year in which the taxpayer places in service the § 179 property. Section 3.02 of Rev. Proc. 2017–33 further provides that until § 1.179–5(c) is

amended to incorporate this guidance, taxpayers may rely on such guidance.

(4) Section 179(d) defines the term “§ 179 property.” Prior to amendment by the TCJA, § 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) and to which § 167 applies; (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 TCJA, § 179(d)(1) further provided that § 179 property does not include any property described in § 50(b).

Section 13101(b)(1) of the TCJA amended § 179(d)(1)(B) to provide that if the taxpayer elects, § 179 property may include qualified real property as defined in § 179(f). Section 13101(c) of the TCJA also amended the flush language in § 179(d)(1) to allow property used predominantly to furnish lodging or in connection with the furnishing of lodging as described in § 50(b)(2) to be § 179 property. These amendments apply to property placed in service in taxable years beginning after December 31, 2017. (5) Prior to amendment by the TCJA, § 179(f)(1) provided that § 179 property included qualified real property if the taxpayer elected the application of § 179(f) for the taxable year, and § 179(f)(2) defined “qualified real property” as meaning qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property described in § 168(e)(6), (7), and (8), respectively, as in effect on the day before the date of the enactment of the TCJA. Section 13101(b)(2) of the TCJA amended § 179(f) by defining qualified real property as (1) any qualified improvement property described in § 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 taxable years beginning after December 31, 2017.

Bulletin No. 2019–03 347 January 14, 2019

Some taxpayers have inquired as to whether the election to treat qualified real property as § 179 property is made in accordance with the § 179 election procedures in § 1.179–5(c) or the procedures in Notice 2013–59, 2013–40 I.R.B. 297, for electing the application of former § 179(f)(1). Section 3 of this revenue procedure addresses this issue.

(6) Section 401(b)(15)(A) of the Consolidated Appropriations Act, 2018, Pub. L. No. 115–141, Div. U, Title IV, 132 Stat. 348 (Mar. 23, 2018) (the “2018 Act”), removed § 179(e), which provided special rules for qualified disaster assistance property, and redesignated § 179(f) as § 179(e).

.02 Modifications to § 168(g). (1) Prior to amendment by the TCJA, § 168(g)(1) provided that the depreciation deduction provided by § 167(a) is determined under the alternative depreciation system for: (A) any tangible property that during the taxable year is used predominantly outside the United States; (B) any tax-exempt use property; (C) any taxexempt bond financed property; (D) any imported property covered by an Executive order under § 168(g)(6); and (E) any property to which an election under § 168(g)(7) applies. Sections 13204(a)(3)(A)(i) and 13205(a) of the TCJA amended § 168(g)(1) by requiring the depreciation deduction provided by § 167(a) to be determined under the alternative depreciation system for the following additional property: nonresidential real property, residential rental property, and qualified improvement property held by an electing real property trade or business as defined in § 163(j)(7)(B); and any property with a recovery period of 10 years or more that is held by an electing farming business as defined in § 163(j)(7)(C). These amendments apply to taxable years beginning after December 31, 2017, without regard to when the property is or was placed in service.

Some taxpayers that are electing real property trades or businesses or electing farming businesses have inquired about how depreciation is changed from the general depreciation system under § 168(a) to the alternative depreciation system under § 168(g) for property placed in service in taxable years beginning before 2018. Section 4 of this revenue procedure addresses this issue.

(2) Prior to amendment by the TCJA, the table of recovery periods under

§ 168(g)(2)(C) provided that the recovery period was 40 years for residential rental property. Section 13204(a)(3)(C) of the 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 taxpayers have inquired whether residential rental property placed in service before 2018 has a recovery period of 30 or 40 years under the alternative depreciation system. Section 4 of this revenue procedure addresses this issue.

.03 Optional depreciation table under the alternative depreciation system for residential rental property placed in ser- vice after 2017. Rev. Proc. 87–57 provides guidance for computing depreciation deductions for tangible property under § 168. Sections 2–7 of Rev. Proc. 87–57 prescribe the manner of computing such depreciation deductions. Section 8 of Rev. Proc. 87–57 contains optional depreciation tables that may be used by certain taxpayers in lieu of computing depreciation deductions in the manner described in sections 2–7 of Rev. Proc. 87–57.

Section 8.01 of Rev. Proc. 87–57 provides that the optional depreciation tables may be used for any item of property placed in service in a taxable year. For all items of property placed in service in a taxable year for which the optional depreciation tables are not used, depreciation deductions must be computed in the manner prescribed in sections 2–7 of Rev. Proc. 87–57.

Section 8.02 of Rev. Proc. 87–57 provides that the optional depreciation tables specify schedules of annual depreciation rates to be applied to the unadjusted basis of the property in each taxable 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. Use of the optional deprecia

tion tables to compute depreciation deductions does not require the filing of any notice with the Internal Revenue Service (IRS).

The IRS has not previously published an optional table for property depreciated under the alternative depreciation system with a recovery period of 30 years and the mid-month convention. Some taxpayers have 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 the alternative depreciation system of § 168(g) using the straight-line method, the new 30-year recovery period required by the TCJA, and the mid-month convention. This table is provided in section 4 of this revenue procedure.

.04 Subsequent References. Unless otherwise specifically stated, all references in the subsequent sections of this revenue procedure to § 168(g) are to § 168(g) as in effect after the enactment of the TCJA and to § 179 are to § 179 as in effect after the enactment of the 2018 Act.