In Revenue Procedure 2019-08 the IRS gives information on the following items following the enactment of the Tax Cuts and Jobs Act:

• Qualified real property under IRC §179;

• Alternative depreciation system (ADS) depreciation of real property with the new 30 and 40 year lives; and

• Handling the transition to ADS depreciation for certain property of electing farming and electing real property businesses.

For years beginning after 2017, the following types of property are qualified real property that may be treated as eligible §179 property under IRC §179(d)(1):

• Qualified improvement property as defined by IRC §168(e)(6) and

• Improvements to nonresidential real property if the improvement:

  • Is §1250 property and

  • Is

    • A roof;

    • Heating, ventilation and air conditioning (HVAC) property;

    • A fire protection or alarm system; or

    • A security system.

The Revenue Procedure provides the following information on the definition of qualified improvement property:

The definition of qualified improvement property in § 168(e)(6) is the same definition of that term in § 168(k)(3) as in effect on the day before the date of enactment of the TCJA. Accordingly, see section 4.02 of Rev. Proc. 2017-33 for further guidance on the definition of qualified improvement property…

The procedure provides the following method for electing to treat qualified real property as §179 property:

A taxpayer may elect to expense under § 179(a) the cost, or a portion of the cost, of qualified real property placed in service by the taxpayer during any taxable year beginning after 2017 by filing an original or amended Federal tax return for that taxable year in accordance with procedures similar to those in § 1.179-5(c)(2) and section 3.02 of Rev. Proc. 2017-33. If a taxpayer elects or elected to expense under § 179(a) a portion of the cost of qualified real property placed in service by the taxpayer during any taxable year beginning after 2017, the taxpayer is permitted to increase the portion of the cost of such property expensed under § 179(a) by filing an amended Federal tax return for that taxable year. Any such increase in the amount expensed under § 179 is not deemed to be a revocation of the prior election for that taxable year.

The Revenue Procedure also provides an optional depreciation table for 30 year ADS property in Section 4.02(2).

The procedure also deals with the change to ADS depreciation for certain assets of electing farm and real property businesses.  Such businesses that wish take advantage of electing out of the interest limitations of IRC §163(j) have to depreciation certain property using ADS depreciation.

The property which must be depreciated using ADS are:

(a) Any nonresidential real property (as defined in § 168(e)(2)(B)), residential rental property (as defined in § 168(e)(2)(A)), and qualified improvement property (as defined in § 168(e)(6)) held by an electing real property trade or business (as defined in § 163(j)(7)(B) and the regulations thereunder); and

(b) 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) and the regulations thereunder). For determining what MACRS property has a recovery period of 10 years or more, the recovery period is determined in accordance with § 168(c).

The requirement to use ADS depreciation applies both to property placed in service in years prior to the year the election is made and property placed in service in the year of election and later years.

The Revenue Procedure provides the following procedure to deal with transitioning existing property to the appropriate ADS depreciation method:

For existing property described in section 4.02(1) of this revenue procedure, as applicable, a change in use occurs under § 168(i)(5) and § 1.168(i)-4(d) for the election year as a result of the election under § 163(j)(7)(B) or (C), as applicable. Accordingly, depreciation for such property beginning for the election year is determined in accordance with § 1.168(i)-4(d). Pursuant to § 1.168(i)-4(f), a change in computing depreciation for the election year for such existing property is not a change in method of accounting under § 446(e). If any such existing property was qualified property under § 168(k) in the taxable year in which the trade or business placed the property in service, the additional first year depreciation deduction allowable for that property is not redetermined. See § 1.168(k)-1(f)(6)(iv)(A)

Under Reg. §1.168(i)-4(d)(4)(ii) the appropriate depreciation for periods beginning with the year of change is computed as follows:

The depreciation allowances for the MACRS property for any 12-month taxable year beginning with the year of change are determined by multiplying the adjusted depreciable basis of the MACRS property as of the first day of each taxable year by the applicable depreciation rate for each taxable year.

The applicable depreciation period is defined by Reg. §1.168(i)-4(d)(4)(ii)(A) as follows:

The applicable depreciation method is the depreciation method that would apply in the year of change and any subsequent taxable year for the MACRS property had the taxpayer used the longer recovery period and/or the slower depreciation method in the placed- in-service year of the property.

The applicable recovery period depends on whether straight line or an accelerated method (150- or 200-percent declining balance) is used.  If straight line depreciation is used the applicable recovery period is:

The number of years remaining as of the beginning of each taxable year (taking into account the applicable convention) had the taxpayer used the longer recovery period in the placed-in-service year of the property if the applicable depreciation method is the straight line method (as determined under paragraph (d)(4)(ii)(A) of this section)...[1]

If an accelerated method is used, the applicable recovery period is:

The longer recovery period resulting from the change in the use if the applicable depreciation method is the 200- or 150- percent declining balance method (as determined under paragraph (d)(4)(ii)(A) of this section)…[2]

For newly-acquired property, the Revenue Procedure provides the following rules:

For newly-acquired property described in section 4.02(1) of this revenue procedure, as applicable, the taxpayer determines the depreciation in accordance with the alternative depreciation system for such property for its placed-in-service year and the subsequent taxable years. Because such newly-acquired property is required to be depreciated under the alternative depreciation system, the property is not qualified property for purposes of the additional first year depreciation deduction under § 168(k). See § 168(k)(2)(D).

The Revenue Procedure also provides information for a taxpayer that makes the election and fails to use ADS on either existing or newly-acquired property.

For existing property, the Revenue Procedure provides the following guidance in that situation:

If an electing real property trade or business or an electing farming business does not depreciate any existing property that is described in section 4.02(1) of this revenue procedure, as applicable, under the alternative depreciation system for the election year and the subsequent taxable year then that trade or business has adopted an impermissible method of accounting for that item of MACRS property. As a result, a change from that impermissible method of accounting to the straight-line method, the applicable recovery period, and/or the applicable convention under the alternative depreciation system for the item of MACRS property is a change in method of accounting under § 446(e). See § 1.446-1(e)(2)(ii)(d)(2)(i). The taxpayer requests to make such a method change by filing Form 3115, Application for Change in Accounting Method, in accordance with the automatic change procedures or non-automatic change procedures, as applicable, in Rev. Proc. 2015-13, 2015-5 I.R.B. 419 (or any successor). If the taxpayer is eligible to make this method change under the automatic change procedures, the method change is described in section 6.05 of Rev. Proc. 2018-31 (or any successor). The § 481(a) adjustment as of the first day of the year of change is calculated as though the change in use occurred for the item of MACRS property in the election year.

For newly-acquired property, the following guidance is provided:

If an electing real property trade or business or an electing farming business does not determine its depreciation under the alternative depreciation system for any newly-acquired property that is described in section 4.02(1) of this revenue procedure, as applicable, for its placed-in-service year and the subsequent taxable year then that trade or business has adopted an impermissible method of accounting for that item of MACRS property. As a result, a change from that impermissible method of accounting to the straight-line method, the applicable recovery period, and/or the applicable convention under the alternative depreciation system for the item of MACRS property is a change in method of accounting under § 446(e). See § 1.446-1(e)(2)(ii)(d)(2)(i). The taxpayer requests to make such a method change by filing Form 3115 in accordance with the automatic change procedures or non-automatic change procedures, as applicable, in Rev. Proc. 2015-13 (or any successor). If the taxpayer is eligible to make this method change under the automatic change procedures, the method change is described in section 6.01 of Rev. Proc. 2018-31 (or any successor), provided none of the inapplicability provisions in section 6.01(1)(c) of Rev. Proc. 2018-31 (or any successor) apply. The § 481(a) adjustment as of the first day of the year of change is calculated as though the taxpayer determined depreciation under the alternative depreciation system for the item of MACRS property beginning for its placed-in-service year.

[1] Reg. §1.168(i)-4(d)(4)(ii)(B)(2)

[2] Reg. §1.168(i)-4(d)(4)(ii)(B)(1)