In Rev. Proc. 2020-25, the IRS provides guidance for implementing the retroactive fix to the retail glitch provided by the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act). The guidance also allows taxpayers to reconsider their elections related to ADS and bonus depreciation.
The CARES Act treats qualified improvement property (QIP) as 15-year property and thus, allows taxpayers to apply 100% bonus depreciation to eligible QIP. The Act also changes the ADS recovery period for QIP to 20 years. It further clarifies that the taxpayer must make the improvements to qualify. The changes apply retroactively to property placed in service on or after Jan. 1, 2018.
Options for implementing changes to QIP
The Rev. Proc. outlines several options for implementing the CARES Act changes to QIP. First, the Rev. Proc. adds a new automatic accounting method change (DCN 244) to Rev. Proc. 2019-43 that does not impose any time limitations related to filing. New section 6.19 of Rev. Proc. 2019-43 applies to taxpayers that want to change from an impermissible method to a permissible method for QIP meeting the following requirements:
- Placed in service after Dec. 31, 2017,
- For which the taxpayer used the impermissible method for at least two tax years, and
- Owned by the taxpayer at the beginning of the year of change.
For taxpayers with QIP that has only used an impermissible method for one year (one-year QIP) and otherwise meets the requirements above, there are several different options.
- First, the taxpayer may file a Form 3115 to change from an impermissible method to a permissible method, provided the section 481(a) adjustment includes the amount attributable to all property subject to the Form 3115.
- Second, the taxpayer may correct the treatment of one-year QIP by filing an amended Federal income tax return, or an administrative adjustment request (AAR) prior to the filing of its Federal income tax return for the year succeeding the placed in service year.
- Third, the taxpayer may file an amended income tax return, amended Form 1065, or AAR under section 3 of Rev. Proc. 2020-25. The section 3 option applies to QIP placed in service after Dec. 31, 2017, in taxable years ending in 2018 (2018 taxable year), 2019 (2019 taxable year) or 2020 (2020 taxable year). Section 3 allows a taxpayer to amend returns for the placed in service year of the QIP on or before Oct. 15, 2021, but not later than the period of limitations. For BBA partnerships, however, taxpayers must amend returns within the time prescribed by Rev. Proc. 2020-23 (generally by Sept. 30, 2020). If the BBA partnership does not amend its return or the placed-in-service year is not within the scope of Rev. Proc. 2020-23, the partnership may file an AAR on or before Oct. 15, 2021.
The accounting method change contains certain inapplicability provisions, including a provision related to late or withdrawn elections for an electing real property trade or business and an electing farming business under section 163(j). Notably absent from the inapplicability provisions is a requirement for a taxpayer to capitalize costs related to depreciation under section 263A as found in section 6.01 of Rev. Proc. 2019-43 for changes related to impermissible to permissible methods of accounting for depreciation.
The new automatic method change waives the eligibility requirements related to prior changes related to the same item within five years and the final year of a taxpayer’s trade or business for a limited time.
Consent to make late elections, or revoke or withdraw certain elections
The guidance addresses three different elections related to bonus depreciation and an election to use ADS depreciation for a taxpayer’s 2018 taxable year, 2019 taxable year or 2020 taxable year. The first bonus election under section 168(k)(5) relates to any specified plant that the taxpayer plants or grafts in the ordinary course of the taxpayer’s farming business. The second bonus election under section 168(k)(7) applies to an election not to deduct bonus for any class of qualified property (e.g., five-year property or 15-year property). The third bonus election under section 167(k)(10) generally allows taxpayers to deduct 50%, instead of 100% bonus depreciation for qualified property acquired after Sept. 27, 2017, and placed in service by the taxpayer in a year that includes Sept. 28, 2017. Elections related to ADS under section 168(g)(7) allow taxpayer to apply ADS to any class of property.
The ability to make a late election under sections 168(g)(7), (k)(5), or (k)(7) turns on whether the taxpayer placed in service depreciable property during its 2018, 2019 or 2020 taxable year, timely filed its tax return for such year on or before April 17, 2020, and did not previously revoke or withdraw the election(s). An extension of the election under section 168(k)(10) contains similar requirements, including the requirement that the taxpayer has filed its tax return for the tax year that includes Sept. 28, 2017. Requirements for revocations of an election under sections 168(g)(7), (k)(5), (k)(7) or (k)(10) also contain the placed in service date requirements and similar filing requirements.
A taxpayer that meets the qualifications for a late election under sections 168(g)(7), (k)(5), (k)(7) or (k)(10) or to revoke an election under section 168(k)(5), (k)(7) or (k)(10) may either:
1. File a Form 3115 under the new automatic accounting method change in section 6.20 of Rev. Proc. 2020-25 (DCN 245)
a. For the taxpayer’s first or second taxable year succeeding the year in which the property was placed in service, or
b. From April 17, 2020 through Oct. 15, 2021
2. File an amended return for the placed in service year of the QIP on or before Oct. 15, 2021, but not later than the period of limitations. Special rules, similar to section 3 of Rev. Proc. 2020-25 apply to BBA partnerships subject to Rev. Proc. 2020-23.
For withdrawal of an ADS election under section 168(g)(7) taxpayers may only use the amended return option. Note that for sections 168(k)(5), (k)(7) or (k)(10) elections, prior guidance under Rev. Proc. 2019-33 related to such elections for a taxable year that includes Sept. 28, 2017 may still provide other options.
QIP placed in service on or after Jan. 1, 2018, falls into the MACRS 15-year property class. Thus, any elections related to QIP must also consider the treatment other 15-year property owned by the taxpayer (e.g. land improvements). Note that the guidance under Rev. Proc. 2020-25 does not provide for any deemed election or the ability to treat QIP placed in service on or after Jan. 1, 2018 as MACRS 39-year property or ADS 40-year property. Thus, taxpayer must apply this Rev. Proc. to adopt proper methods of accounting for QIP impacted by the CARES Act.
Rev. Proc. 2020-25 provides much needed guidance for taxpayers seeking to implement the taxpayer favorable changes provided by the CARES Act. The guidance of granting consent either to make late elections, or revoke or withdraw certain elections, may also provide taxpayer with the option to reconsider elections made under TCJA if such elections fall within Rev. Proc. 2020-25.