Revenue Procedure 2016-48 provides transition rules for PATH Act depreciation changes.
We’ve discussed the effect of the PATH Act on real property clients before on this blog. In those discussions, we’ve noted that the PATH Act became law at the end of 2015 and that it retroactively reinstated certain depreciation provisions that had expired at the end of 2014. Even though retroactive reinstatement was widely expected, those provisions were not available during calendar year 2015 impacting fiscal year filers and short tax years beginning and ending in 2015. Therefore, the IRS provided the following guidance in Revenue Procedure 2016-48:
- Section 4 provides the procedures for claiming or not claiming bonus depreciation while the provision had lapsed, or who elected to not claim bonus depreciation for a class of property.
- Section 3 provides the procedures to carryover the amount of qualified real property expensed in a prior year that was limited by the taxable income limitation, to a taxable year beginning in 2015.
- Section 5 provides the procedures for a corporation to elect to forgo bonus depreciation in order to allow tax credits generated before 2006 to be used.
The PATH Act retroactively reinstated and extended bonus depreciation for qualified property and made changes impacting improvements to commercial buildings placed in service after December 31, 2015 (please see our prior post). Taxpayers with a fiscal tax year that ended in 2015 or with a short tax year that began and ended in 2015 may not have claimed bonus depreciation during the period in which the provision had lapsed, or may have elected to not claim bonus depreciation for a class of property. These taxpayers have the following options:
- Amend the tax return to claim bonus depreciation on qualified assets before filing the return for the fiscal tax year ending in 2016;
- File Form 3115 under Section 6.01 of Rev. Proc. 2016-29 with a timely filed tax return for the fiscal tax year ending in 2016 or 2017; and
- Revoke the election to not claim bonus depreciation for a class of property by filing an amended federal tax return by the earlier of November 11, 2016, or before filing the return for the fiscal tax year ending in 2016.
Section 179 Expensing
The PATH Act reinstated Section 179 expensing of assets in the year placed in service retroactive to January 1, 2015, and made the provision a permanent part of the Tax Code. The Act did retain the limited applicability of this section to commercial real estate to only “qualified real property,” meaning:
- Qualified leasehold improvement property,
- Qualified restaurant property, or
- Qualified retail improvement property.
The permanent provision allows a $500,000 deduction (up from $250,000), but still phases that deduction out dollar-for-dollar to the extent that property placed in service in the year exceeds $2 million. Both the $500,000 and $2 million are indexed for inflation going forward. If a taxpayer makes this election for qualified real property, the entire cost of the qualified real property is taken into consideration for the annual dollar limitation.
Unused deductions can be carried forward to future years. Prior to the PATH Act changes, the carryforward provision as it applied to qualified real property required that any amount carried forward must be treated as depreciable property placed in service on the first day of the last tax year ending in 2014. The Rev. Proc. allows taxpayers to carryover the amount to any taxable year beginning in 2015.
New Options for Commercial Real Estate Owners
The PATH Act has presented commercial real estate owners with new or expanded options that haven’t been available before. Advisors need to make sure that they and their clients are seeing the big picture when it comes to potential tax-saving opportunities. Under the old version of Section 179, benefits for real estate phased out quickly at a low threshold and the carryforward was limited to no later than 2014. As a result, people have gotten accustomed to not considering it in their projections. The new rules allow an indefinite carryforward and also index the deduction amount and the phase-out threshold for inflation. The deduction remains unchanged for 2016, but the phase-out threshold will increase to $2,010,000.
The PATH Act made bonus depreciation available to more property owners, expanding the previous “qualified leasehold improvement property” restriction to a broader “qualified improvement property” category. As a result, commercial real estate owners should realize even more tax savings over the next four years by engaging cost segregation professionals who can segregate costs to acquire and improve commercial buildings.
As always, CSP360 is ready to help. Some of your clients may have a fiscal year situation that was remedied by Rev. Proc. 2016-48. Our commercial real estate focus makes us an ideal back-office support team when it comes to providing specialized, high-quality service to real estate clients. Please contact us for more information about how we can help you better serve current clients and grow your real estate practice.