United States

Bonus depreciation and section 179 extension guidance released

TAX ALERT  | 

The IRS recently released Rev. Proc. 2015-48, providing guidance relating to the extension of bonus depreciation and increased section 179 expensing limitations under the Tax Increase Prevention Act of 2014 (TIPA). The TIPA was enacted on Dec. 19, 2014, and includes, among other items, the following provisions:

  • 50% bonus depreciation under section 168(k) is generally extended to qualified property placed in service before 2015
  • The election to forego bonus depreciation in exchange for an increased alternative minimum tax (AMT) credit limit under section 53(c) is generally extended to qualified property placed in service after 2013 and before 2015
  • The increased section 179 deduction of up to $500,000 is extended to taxable years beginning before 2015 with the phase-out beginning at $2 million
  • The ability to carry over disallowed amounts under section 179 for qualified real property is extended to tax years beginning in 2014

By the date of enactment of the TIPA, certain taxpayers with fiscal tax-years beginning in 2013 or short tax years beginning in 2014 may have already filed their 2013 or 2014 short year tax returns without taking into account the above extenders for otherwise qualified property acquired and placed in service during 2014. Rev. Proc. 2015-48 provides various options for such taxpayers to either amend the applicable tax return or to file a Form 3115, Request for Change in Accounting Method, for the current year to take into account the extended provisions. Because of the various due dates provided by Rev. Proc. 2015-48, and depending on the option chosen, affected taxpayers should work with their tax advisors to determine the best method of applying the guidance provided by Rev. Proc. 2015-48.

Retroactive application of 50 percent bonus depreciation

Rev. Proc. 2015-48 provides various options for taxpayers with a fiscal tax year beginning in 2013 or for taxpayers with a short tax year during 2014 to either claim missed bonus depreciation on their 2014 qualified property or to make a deemed election not to claim bonus depreciation on all qualified property within a particular class placed in service during the tax year. The revenue procedure defines 2014 qualified property as property that is otherwise qualified under section 168(k) and is placed in service by the taxpayer after Dec. 31, 2013, in its 2013 tax year or 2014 short tax year, as applicable.

Taxpayer failed to elect out of bonus depreciation
If the taxpayer failed to elect out of bonus depreciation on the timely filed 2013 or 2014 short tax year return and the taxpayer did not claim bonus depreciation on its 2014 qualified property, the taxpayer may claim the missed bonus depreciation on such property in one of two ways.

  • The taxpayer may file an amended return to claim the bonus depreciation before the taxpayer files its tax return for the tax year succeeding the 2013 tax year or 2014 short tax year
  • Alternatively, the taxpayer may file a Form 3115 to request an accounting method change to claim the missed bonus depreciation in the current year if the taxpayer requests the change for the first or second tax year succeeding the 2013 tax year or 2014 short tax year

In order to choose the alternative option, the taxpayer must own the assets as of the beginning of the year of change (i.e., the year for which the Form 3115 is filed).

Taxpayer elected out of bonus depreciation
If the taxpayer made a valid election out of bonus depreciation on the timely filed 2013 or 2014 short tax year return, the taxpayer may revoke the election by filing an amended return for the applicable tax year to claim the bonus depreciation on the qualified property. The taxpayer must amend the return for the 2013 or 2014 short tax year by the later of:

  • Dec. 5, 2014; or
  • Before the taxpayer timely files its federal tax return for the first tax year succeeding the applicable year.

Alternatively, if the taxpayer made a valid election out of bonus depreciation on the timely filed 2013 or 2014 short tax year return and wishes to abide by such election, the taxpayer need not take any further action.

Deemed election out of bonus depreciation
A taxpayer that fails to amend its return or file a Form 3115 within the time-frames provided above will be treated as making a deemed election out of bonus depreciation for one or more classes of property if the taxpayer did not include a statement electing out of bonus with its timely filed 2013 or 2014 short year tax return and did not deduct bonus depreciation for that class of property (but did deduct regular depreciation) on such return.

Election to accelerate AMT credits in lieu of bonus depreciation

Corporate taxpayers that elected to accelerate AMT and research credits in lieu of bonus depreciation under section 168(k)(4) for round 3 extension property (i.e., property that is qualified under section 168(k)(4) solely by reason of the extension of bonus depreciation under the American Taxpayer Relief Act of 2012) may choose not to apply such election to round 4 extension property placed in service by the taxpayer in the first tax year ending after Dec. 31, 2013, and in any subsequent tax year.

Round 4 extension property includes property that is eligible qualified property under section 164(k)(4) solely by reason of the extension of bonus depreciation under the TIPA. If a taxpayer wishes to make an election not to apply section 168(k)(4) to round 4 extension property it should follow the election procedures in section 4.02 or 4.03 of Rev. Proc. 2009-33, as applicable.

Deemed election not to accelerate AMT credits in lieu of bonus depreciation
A taxpayer will be treated as making a deemed election not to apply section 168(k)(4) to round 4 extension property in the following scenario:

  • On or before Dec. 4, 2015, the taxpayer timely filed its original federal income tax return for the first tax year ending after Dec. 31, 2013, and includes with such tax return Form 4562 indicating that the taxpayer claimed bonus depreciation for all round 4 extension property (unless the taxpayer validly elected out of bonus depreciation for one or more classes of property under section 162(k)(2)(D)(iii)) and uses the applicable depreciation method for such property under section 168(b)
  • By Dec. 4, 2015, the taxpayer provides written notification to any partnership to which the taxpayer is a partner (and, in the case of a taxpayer that is a member of a controlled group, to all other members of the controlled group) that the taxpayer is making the election not to apply section 168(k)(4) to round 4 extension property

Members of a consolidated group of corporations will be treated as making a deemed election not to apply section 168(k)(4) to round 4 extension property if the common parent of the group follows the above procedures for all members. An election not to apply section 168(k)(4) to round 4 extension property is binding on all members of a controlled group of corporations.

Election to accelerate AMT credits in lieu of bonus depreciation
Alternatively, Rev. Proc. 2015-48 provides procedures for taxpayers that did not have an election in effect under section 168(k)(4) for round 3 extension property to make an election to accelerate AMT credits in lieu of bonus depreciation for all round 4 extension property placed in service in the first tax year ending after Dec. 31, 2013, and in any subsequent tax year, even if the taxpayer does not place in service any round 4 extension property in its first taxable year ending after Dec. 31, 2013. A taxpayer makes this election by following the election procedures in section 6.02, 6.03, or 6.04 in Rev. Proc. 2009-33 on the timely file federal income tax return for the first tax year ending after Dec. 31, 2013. Section 6.06 of Rev. Proc. 2009-39 provides procedures to make a late election where the taxpayer has already timely filed its tax return for the first tax year ending after Dec. 31, 2013.

A taxpayer will be treated as making a deemed election to accelerate AMT credits in lieu of bonus depreciation for round 4 extension property in the following scenario:

  • On or before Dec. 4, 2015, the taxpayer timely filed its original federal income tax return for the first tax year ending after Dec. 31, 2013
  • In the case of a C corporation, the taxpayer claimed the refundable credit on the appropriate line of the Form 1120 in such return
  • In the case of an S corporation, the taxpayer made appropriate adjustments to the appropriate line of the original Form 1120S to reflect the application of section 168(k)(4) for the round 4 extension property
  • The taxpayer filed with the original tax return Form 4562 indicating that the taxpayer used the straight line method of depreciation and did not claim bonus depreciation for all round 4 extension property placed in service during the year
  • By Dec. 4, 2015, the taxpayer provides written notification to any partnership to which the taxpayer is a partner (and, in the case of a taxpayer that is a member of a controlled group, to all other members of the controlled group) that the taxpayer is making the election to apply section 168(k)(4) to round 4 extension property

Members of a consolidated group of corporations will be treated as making a deemed election to apply section 168(k)(4) to round 4 extension property if the common parent of the group follows the above procedures for all members. An election to apply section 168(k)(4) to round 4 extension property is binding on all members of a controlled group of corporations.

Extension of the carry-over for disallowed amounts for qualified real property under section 179

The TIPA extended the increased expending limitation for qualified real property under section 179(a) to tax years beginning before 2015. Qualified real property is generally defined as qualified improvement, retail and restaurant property under section 168. A taxpayer that places qualified real property placed in service in tax years beginning after 2009 and 2015 may elect to expense up to $250,000 of the cost of such property, reduced by the amount such property exceeds $2 million. The section 179 expense is further limited to the taxpayer's taxable income for that year (the taxable income limitation). Prior to the TIPA, the amounts disallowed under the taxable income limitation for qualified real property could not be carried over to a tax year beginning after 2013. Rather, these amounts were required to be treated as amounts for property placed in service on the first day of the taxpayer's last taxable year beginning in 2013. The TIPA extended this provision by allowing the carryover of the disallowed amounts for qualified real property into tax years beginning in 2014.

Under Rev. Proc. 2015-48, taxpayers that treated the amount of a 2010, 2011, 2012 or 2013 disallowed section 179 deduction for qualified real property as placed in service on the first day for the taxpayer's last taxable year beginning in 2013 have two options. Such taxpayers may:

  • Continue such treatment
  • Amend the tax return for the last taxable year beginning in 2013 to reflect the carryover of the disallowed amounts

A taxpayer choosing to amend its return must make any collateral adjustments to taxable income or liabilities (e.g., to remove any depreciation deductions related to the affected amounts) in the amended return and in any succeeding taxable years. Thus, such taxpayers may also be required to amend succeeding tax returns to reflect any of these collateral adjustments. A taxpayer may only choose this second option if the period for limitations on assessment under section 6501(a) is still open for all affected tax years.

Implications

Since taxpayers with fiscal years beginning in 2013 and/or short tax years beginning in 2014 may have already filed their tax returns for the applicable year or years by the time bonus depreciation and increased section 179 expensing and carry-over limitations were extended by the TIPA, these taxpayers may have been disadvantaged by not taking into account the favorable extensions for 2014 qualified property or qualified real property under section 179. Rev. Proc. 2015-48 provides welcome relief to such taxpayers by allowing them the ability to choose to amend prior-year returns or, in certain cases, request a current-year accounting method change to take into account missed bonus depreciation. However, many of the options provided by Rev. Proc. 2015-48 come with time-limits that must be carefully considered and adhered to. Taxpayers that are within the scope of Rev. Proc. 2015-48 and want to claim either missed bonus depreciation on 2014 qualified property, elect in or out of the provisions of section 168(k)(4) to accelerate AMT credits in lieu of bonus depreciation for round 4 extension property, or reflect the carryover of qualified real property disallowed under the taxable income limitation of section 179 should work closely with their tax advisors to understand each potential option and its corresponding due date.

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