Key Takeaways
- Rev. Proc. 2022-23 provides for late elections-related accelerate depreciation for certain qualified Indian reservation property and second generation biofuel property
- Taxpayers also may make a retroactive election to deduct certain film, television, or live theatrical production costs
- For a limited time, Taxpayers may use method changes, amended returns, or AARs to file late elections
The IRS recently issued Rev. Proc. 2022-23, effective April 19, 2022, which provides guidance on how taxpayers can make late elections out of accelerated depreciation methods for qualified Indian reservation property and second generation biofuel plant property, and late elections to deduct certain production expenses under section 181. Retroactive changes can create opportunities or compliance challenges as taxpayers determine whether their prior accounting methods are permissible.
The Rev. Proc. applies to late elections under sections 168(j)(8) and 168(l)(3)(D) for taxable years ending in 2018 (2018 taxable year) or 2019 (2019 taxable year) for certain property placed in service by the taxpayer after Dec. 31, 2017, as well as section 181(a)(1) for the 2018 taxable year or 2019 taxable year for certain film, television or live theatrical productions commenced by the taxpayer after Dec. 31, 2017.
What kind of property/taxpayers does this affect?
Qualified Indian reservation property – section 168(j)(1) allows for accelerated recovery periods for qualified Indian reservation property (as defined in section 168(j)(4)). Section 168(j)(8) permits a taxpayer to elect out of the shorter recovery periods for such property and instead use the longer recovery periods provided in section 168(c). Section 168(j) previously applied only to property placed in service prior to Dec. 31, 2017, but Congress retroactively extended the provision to apply to property placed in service on or before Dec. 31, 2021. Certain taxpayers who placed qualified Indian reservation property into service may be using longer recovery periods based on the law in place at the time of filing their tax return. However, even though the taxpayers may have used a proper recovery period at the time they filed their return, the retroactive law changes render the method improper.
Qualified second generation biofuel plant property – similarly, section 168(l)(1) allows for an additional 50% first-year depreciation deduction for qualified second generation biofuel plant property (as defined in section 168(l)(2)) for the taxable year in which the property is placed in service. Section 168(l)(3)(D) permits a taxpayer to elect out of this special depreciation allowance. Section 168(l) previously applied only to property placed in service before Jan. 1, 2018, but Congress retroactively extended the provision to apply to property placed in service prior to Jan. 1, 2021. Taxpayers who placed qualified second-generation biofuel plant property into service after the initial expiration would not have applied special depreciation. After the law changed, the once permissible method became an impermissible method.
Certain qualified film, television or live theatrical production costs – section 181(a)(1) allows taxpayers to elect to treat qualified film, television, or live theatrical production costs, as deductible expenses not chargeable to a capital account. Generally, a taxpayer may make a section 181 election if the taxpayer did not deduct any production costs under another Internal Revenue Code provision. Section 181(a)(1) was previously applicable only to productions commencing prior to Dec. 31, 2017, but was retroactively extended by Congress to apply to production costs related to productions commencing on or before Dec. 31, 2025.
How the retroactive changes and new guidance affect taxpayers
Typically, a taxpayer must make these elections by the due date, including extensions, of the Federal tax return for the taxable year in which the property is placed in service (for section 168) or the first taxable year in which (i) any aggregate production costs have been paid or incurred, and (ii) the owner reasonably expects that the production will be a qualified production (for section 181). A taxpayer relying on the law at the time likely would not have made these elections in taxable years 2018 and 2019.
Rev. Proc. 2022-23 treats making a late election under sections 168(j)(8), 168(l)(3)(D) or 181(a)(1) as a change in method of accounting with a section 481(a) adjustment permitted for a limited time. The Rev. Proc. does not appear to treat taxpayers as having made a deemed election out of the accelerated depreciation provisions under sections 168(j) or 168(l)(1) if they used the less favorable methods at the time. Therefore, taxpayers who wish to continue the less accelerated methods should consider the procedures to make a late election under section 168(j)(8) or section 168(l)(3)(D). Alternatively, taxpayers who wish to take advantage of the more taxpayer-favorable methods should discuss options with their service provider to ensure their methods align with the retroactive change and claim the additional depreciation deductions.
While the guidance does not explicitly address taxpayers that want to take advantage of the favorable retroactive changes for qualified Indian reservation property and qualified second generation biofuel plant property, we believe that a Form 3115, Application for Change in Accounting Method, using DCN 7 (Impermissible to a permissible method of accounting for depreciation or amortization) may allow taxpayers to benefit from the retroactive changes.
How to make the changes
Taxpayers who incurred, but did not deduct, qualified film, television or live theatrical production costs related to a production commencing after Dec. 31, 2017, have the option to take no action and continue the current method or may be permitted to file a late section 181(a)(1) election to deduct the costs.
For taxpayers with certain timely filed returns, Rev. Proc. 2022-23 permits taxpayers to make these late elections for (1) qualified Indian reservation property or qualified second generation biofuel plant property placed in service after Dec. 31, 2017, during the taxpayer’s 2018 taxable year or 2019 taxable years, or (2) qualified film, television or live theatrical production costs related to productions commencing after Dec. 31, 2017, and during the taxpayer’s 2018 or 2019 taxable year, as applicable.
A qualified taxpayer may make the late section 168 elections by either (1) filing an amended tax return or AAR for the placed-in-service year of the applicable property provided it is not later than Dec. 31, 2022, or the applicable period of limitations on assessment for the taxable year for which the amended return or AAR is being filed, or (2) filing a Form 3115, with the taxpayer’s first or second timely filed original Federal tax return that is filed after April 19, 2022.
Similarly, a qualified taxpayer may make a late section 181(a)(1) election by either (1) filing an amended tax return or AAR for the 2018 or 2019 taxable year, as applicable, provided it is not later than Dec. 31, 2022, or the applicable period of limitations on assessment for the taxable year for which the amended return or AAR is being filed or (2) filing a Form 3115 with the taxpayer’s first or second timely filed original Federal tax return that is filed after April 19, 2022.
If filing a Form 3115, the new designated automatic accounting method change number is 264, and short Form 3115 filing procedures apply. For full details on filing procedures, refer to Section 6.02 of Rev. Proc. 2022-23 and contact a member of the accounting methods and periods team with any questions. If filing an amended return or AAR, taxpayers should not delay.
