United States

IRS issues procedures to apply bonus regulations retroactively

TAX ALERT  | 

In Rev. Proc. 2020-50, the IRS provides taxpayers with flexibility to consider the application of various bonus depreciation regulations retroactively. The guidance generally applies to depreciable property acquired by a taxpayer after Sept. 27, 2017, and placed in service before the taxpayer’s first taxable year that begins on or after Jan. 1, 2021. 

Background

The amendments to section 168(k) by Public Law 115-97, commonly referred to as The Tax Cuts and Jobs Act (TJCA), generated several rounds of bonus depreciation regulations:

  • 2018 Proposed Regulations (REG-104397-18)
  • 2019 Final Regulations (T.D. 9874)
  • 2019 Proposed Regulations (REG -106808-19)
  • 2020 Final Regulations (T.D. 9916)

As the regulations progressed, decisions made in earlier years may require taxpayers to reconsider prior applications of the earlier regulations, including elections made by taxpayers.

The options

A qualifying taxpayer within the scope of Rev. Proc. 2020-50 may change its method of accounting to apply in their entirety and in a consistent manner: (1) the 2020 Final Regulations; (2) the 2019 Final Regulations; or (3) both the 2019 Final Regulations and the 2019 Proposed Regulations. Revenue Procedure 2020-50 provides taxpayers with the following options for applying of various bonus depreciation regulations, including certain elections, retroactively.

(1) File amended return(s);

(2) Administrative adjustment request(s) (AAR); or

(3) File Form(s) 3115 (Application for Change in Accounting Method).

Taxpayers filing amended federal income tax returns must file the amended returns for the placed in service year on or before Dec. 31, 2021, but in no event later than the applicable period of limitations. BBA partnerships may file an AAR for the placed in service year on or before Dec. 31, 2021, but in no event later than the applicable period of limitations under section 6235 for the reviewed years. An amended return or AAR must take into account any collateral adjustments, including section 163(j) and returns or AARs for affected succeeding taxable years.

The guidance introduces two new accounting method change procedures – DCN 246 (impermissible to permissible method) and DCN 247 (permissible to another permissible method). A change to apply retroactively the regulations falls under DCN 246 the first time a taxpayer makes the change with respect to an asset, and the Rev. Proc. deems the change to be a change from an impermissible method of accounting to a permissible method of account made with a section 481(a) adjustment. Any subsequent change by a taxpayer to a method of accounting for depreciation to comply with the various other regulations for the same asset equates to a change from a permissible method of accounting to another permissible method and requires the use of a cut-off.

Notably, if a trade or business has floor plan financing indebtedness and applies the rules related to taking into account floor plan financing interest expense, the section 481(a) adjustment must account for the proper amount of interest expense, taking into account the business interest limitation under section 163(j), as of the beginning of the year of change. The provision provides a critical correction procedure for taxpayer that previously treated the ability to apply the floor plan financing exception of section 163(j) as elective. 

Consent to revoke or make late elections 

The guidance also addresses revoking or making late bonus depreciation elections for the following by allowing taxpayers to file amended return(s), AAR(s), and Form(s) 3115.  

  • Section 168(k)(5) election applies to any specified plant that the taxpayer plants or grafts in the ordinary course of the taxpayer’s farming business. 
  • 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). 
  • 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. 
  • Prop. Reg. section 1.168(k)-2(c) (Proposed component election) election for components of larger self-constructed property for which the manufacture, construction or production begins before Sept. 28, 2017
  • Reg. section 1.168(k)-2(c) (component election) election for components of larger self-constructed property for which the manufacture, construction or production begins before Sept. 28, 2017
  • Reg. section 1.1502-68(c)(4) (designated transaction election) election not to apply the Consolidated Asset Acquisition Rule or the Consolidated Deemed Acquisition rule to all eligible property 

Generally, under the guidance taxpayers meeting certain requirements may (i) revoke elections under sections 168(k)(5), (7), (10) or a proposed component election, or (ii) make late elections under 168(k)(5), (7), or (10), or a component election, designated transaction election, or a proposed component election. The timing for filing an amended return or an AAR mirrors the timing for retroactively adopting the regulations and requires that taxpayer take into account any collateral adjustments. 

The Form 3115 must be filed for the taxpayer’s first or second taxable year succeeding the placed in service year, or if later, with the taxpayer’s timely filed return that is filed on or after Nov. 6, 2020, and on or before Dec. 31, 2021. The available late elections are treated as an accounting method change with a section 481(a) adjustment during this limited period.

Takeaway

Revenue Procedure 2020-50 provides taxpayers with a limited opportunity to reconsider their prior treatment of depreciable asset and consider if the subsequent change to the bonus regulations offer any opportunities or pose any risks. 

AUTHORS