Cost recovery changes in the TCJA.

• Author: Ray, Richard
• Position: Tax Cuts and Jobs Act of 2017

Some of the changes brought about by the law known as the Tax Cuts and Jobs Act (TCJA) (1) were straightforward, including increasing standard deductions and eliminating personal exemptions. Others, however, were more complex, such as various changes that the TCJA made to cost recovery. This article discusses some of the cost recovery changes in the TCJA, focusing in particular on the ones addressed in Rev. Proc. 2019-8, which include deducting expenses under Sec. 179(a) and deducting depreciation under Sec. 168(g).

Expensing qualified real property

Under Sec. 179, taxpayers can deduct the cost of certain property as an expense when the property is placed in service. The Sec. 179 deduction applies to tangible personal property, such as equipment or machinery purchased for use in a trade or business. If the taxpayer elects, the deduction can also be used for "qualified real property."

The TCJA expanded the types of real property that are eligible for immediate expensing. Prior to the 2017 law, qualified real property included only three categories of property--qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property. For an improvement to be qualified leasehold improvement property or qualified retail improvement property, the improvement had to be placed in service more than three years after the building the improvement was made to was placed in service. can be expensed under Sec. 179. It replaced the three categories of property included in qualified real property described above with a single category of property called "qualified improvement property," or QIP, which is defined as any improvement to an interior portion of a building that is nonresidential real property (other than an improvement that is attributable to an enlargement of a building, any elevator, escalator, or the internal structural framework of the building). (2) In addition, the TCJA added to qualified real property the following improvements to nonresidential real property:

* Roofs;

* Heating, ventilation, and air-conditioning property (HVAC);

* Fire protection and alarm systems; and

* Security systems.

The changes made by the TCJA apply to property placed in service in tax years beginning after 2017 that is placed in service after the date the building was first placed in service by any person.

Rev. Proc. 2019-8 explains how to make an election to treat qualified real property as Sec. 179 property. (3) Under the procedure, a taxpayer may elect (without the IRS's consent) to expense the cost, or a portion of the cost, of qualified real property placed into service for any tax years beginning after 2017 by filing an original or amended tax return for that tax year in accordance with procedures similar to those in Regs. Sec. 1.179-5(c)(2) and Section 3.02 of Rev. Proc. 2017-33. The election must specify the items of Sec. 179 property and the portion of the cost of each such item to be taken into account under Sec. 179(a). (4) Essentially, this can be accomplished by completing Part I of Form 4562, Depreciation and Amortization, and filing the form with the original or amended return.

Alternative depreciation system (ADS)

The TCJA also expanded the situations...