IRS guidance expands 179 expenses, 168(g) depreciation

IRS headquarters in Washington, D.C.
IRS headquarters in Washington, D.C.

The IRS has issued guidance on deducting expenses under Section 179(a) and on deducting depreciation under Section 168(g).

These rules, in Revenue Procedure 2019-08 and as amended by the Tax Cut and Jobs Act, generally apply to tax years beginning after 2017.

Sec. 179 allows taxpayers to deduct the cost of certain property as an expense when the property is placed in service. For tax years beginning after 2017, the TCJA increased the maximum 179 expense deduction to $1 million from $500,000. The phase-out limit increased from $2 million to $2.5 million. These amounts are indexed for inflation for tax years beginning after 2018.

The deduction applies to tangible personal property such as machinery and equipment purchased for use in a trade or business, and if the taxpayer elects, qualified real property. The TCJA amended the definition of qualified real property to mean qualified improvement property and some improvements to nonresidential real property, such as roofs; heating, ventilation and air-conditioning property; fire protection and alarm systems; and security systems.

For tax years beginning after 2017, the TCJA also expanded the businesses that must use the alternative depreciation system under Section 168(g) (ADS). A farming business can elect out of the interest deduction limit of Section 163(j). If it does, the business must use the ADS for property with a recovery period of 10 years or more. A real property trade or business can also elect out of the Section 163(j) limit. If it does, the business must use the ADS for non-residential real property, residential rental property and qualified improvement property.

Finally, the TCJA changed the ADS recovery period of residential rental property. For property placed in service after 2017, the recovery period is 30 years (formerly 40 years). Revenue Procedure 2019-08 provides an optional depreciation table for residential rental property depreciated under the ADS with a 30-year recovery period.

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