On December 21st of 2018, the Internal Revenue Service (hereinafter the “Service”) issued new administrative guidance in the form of Rev. Proc. 2019-08 governing expense deductions and depreciation measures in connection to real property as enacted by the 2017 Tax Cuts and Jobs Act, Pub. L. No. 115-97, (hereinafter the “TCJA”’). It should be duly recalled, the TCJA enacted the subsequent tax law amendments including, but not limited to:
- I. R.C. § 179 by modifying the definition of “Qualified Real Property” that may be eligible as I.R.C. § 179 property pursuant to I.R.C. § 179(d)(1);
- I. R.C. § 168 by requiring certain property held by an electing real property trade or business and reducing the recovery period under the Alternative Depreciation System (hereinafter “ADS”) from 40 years to 30 years for commercial residential real estate property; and
- I. R.C. § 168 by requiring certain property held by an electing farming business to be depreciated under the ADS.
Rev. Proc. 2019-08 is effective December 21st of 2018 and encompasses modifications to both Rev. Proc. 87-57 and Rev. Proc. 2018-31 while providing administrative guidance to the aforementioned tax law changes under the TCJA. More specifically, the Service’s statement of procedure under Rev. Proc. 2019-08 provides administrative guidance on deducting expenses pursuant to I.R.C. § 179(a) and on deducting depreciation under I.R.C. § 168(g) for tax years beginning after December 31st of 2017 including, but not limited to:
- I. R.C. § 179 allowing 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 maximum amount of the expense deduction under I.R.C. § 179 was increased from $ 500,000 to $ 1 million. In addition, the phase-out limitation was increased from $ 2 million to $ 2.5 million. These amounts are indexed for inflation for tax years beginning after 2018;
- The category of businesses that must use the ADS under I.R.C. § 168(g) has been modified and expanded. A qualified farming business as defined under I.R.C. § 163(j)(7)(C) can elect out of the interest deduction limit of I.R.C. § 163(j). However, a qualified farming business that does elect out must now 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 I.R.C. § 163(j) limit. If it does, the business must use the ADS for nonresidential real property, residential rental property, and qualified improvement property;
- The ADS recovery period for commercial residential real estate property has been modified to require a recovery period of 30 years; and
- The Service’s statement of procedure also provides an optional depreciation table for commercial residential real estate property depreciated under the ADS with a 30-year recovery period.
To properly ascertain the complete scope and application of Rev. Proc. 2019-08 and its impact on tax return filing positions (e.g., obtaining a “Substantial Authority” standard; obtaining a “More-Likely-Than-Not” standard; obtaining a “Should” standard) this statement of procedure should be methodically reviewed and can be accessed at https://www.irs.gov/pub/irs-drop/rp-19-08.pdf
It should be duly recalled that when ascertaining tax return filing positions per Circular 230 and the Internal Revenue Code (hereinafter the “Code”), a Revenue Procedure is defined as a statement of procedure that affects the rights or duties of taxpayers or other members of the public under the Code. Similarly to Revenue Rulings, Revenue Procedures are less authoritative than Temporary or Final Treasury Regulations which have the force and effect of law. However, Revenue Procedures should be binding on the Service and may be relied upon by taxpayers and cited as valid legal precedent in determining a tax return filing position. As a caveat, positions taken on tax returns may need to be disclosed on Form 8275 entitled “Disclosure Statement” or Form 8275-R entitled “Regulation Disclosure Statement” depending upon the complexity and controversial nature of the tax matter. In the event a Temporary or Final Treasury Regulation which has the force and effect of law contradicts a previously issued revenue procedure then Form 8275-R would need to be filed with your client’s tax returns. Noting, by disclosing positions on your client’s tax returns you may be able to avoid paid preparer penalties should your position be disallowed and avoid the application of the six-year statutory period for assessment under I.R.C. § 6501(e).
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