IRS Allows Taxpayers to Choose to Apply Final or Proposed Bonus Depreciation Regs

(Parker Tax Publishing November 2020)

The IRS provided a procedure for taxpayers wishing to apply the final and/or proposed bonus depreciation regulations under Code Sec. 168(k) to (1) certain depreciable property acquired and placed in service after September 27, 2017, by the taxpayer during its tax years ending on or after September 28, 2017, and before the taxpayer's first tax year that begins on or after January 1, 2021; (2) certain plants planted or grafted, as applicable, after September 27, 2017, by the taxpayer during its tax years ending on or after September 28, 2017, and before the taxpayer's first tax year that begins on or after January 1, 2021; and (3) components acquired, or self-constructed, after September 27, 2017, of certain larger self-constructed property and placed in service by the taxpayer during its tax years ending on or after September 28, 2017, and before the taxpayer's first tax year that begins on or after January 1, 2021. If the taxpayer retroactively applies the final or proposed regulations, the procedure also allows a taxpayer to revoke or make late elections under Code Sec. 168(k) for the taxpayer's tax years ending on or after September 28, 2017, and before the taxpayer's first tax year that begins on or after January 1, 2021. Rev. Proc. 2020-50.

Background

Before the Tax Cuts and Jobs Act (TCJA), Code Sec. 168(k)(1) allowed a 50-percent additional first year depreciation (bonus depreciation) deduction for qualified property for the tax year in which the qualified property is placed in service by the taxpayer. Qualified property was defined in part as property the original use of which begins with the taxpayer. TCJA made several changes to Code Sec. 168(k). For example, the bonus depreciation deduction percentage was increased from 50 to 100 percent; property eligible for the bonus depreciation deduction was expanded to include certain used depreciable property and certain film, television, or live theatrical productions. The TCJA amendments to Code Sec. 168(k) generally apply to property acquired and placed in service after September 27, 2017, and to specified plants planted or grafted after September 27, 2017.

On September 24, 2019, the IRS published final regulations in T.D. 9874 (2019 final regulations). The 2019 final regulations provide: (1) a 5-year safe harbor for determining if the taxpayer or a predecessor previously had a depreciable interest in used property; (2) a rule for determining whether substantially renovated property was used by the taxpayer or a predecessor before its acquisition; (3) that the acquisition date of property that the taxpayer acquired pursuant to a written binding contract is the later of (i) the date on which the contract was entered into, (ii) the date on which the contract is enforceable under State law, (iii) if the contract has one or more cancellation periods, the date on which all cancellation periods end, or (iv) if the contract has one or more contingency clauses, the date on which all conditions subject to such clauses are satisfied; and (4) that property manufactured, constructed, or produced for a taxpayer by another person under a written binding contract entered into prior to the manufacture, construction, or production of the property for use by the taxpayer in its trade or business or production of income, is self-constructed property for purposes of determining the acquisition date of such property.

Along with the 2019 final regulations, the IRS published proposed regulations (REG-106808-19) (2019 proposed regulations), which provided additional guidance beyond that provided in the 2019 final regulations. For example, the 2019 proposed regulations provided rules: (1) regarding property described in Code Sec. 168(k)(9), (2) for determining whether the taxpayer or a predecessor previously had a depreciable interest in (i) used property where the prior use was de minimis, (ii) property acquired in a series of related transactions, and (iii) property acquired by a consolidated group; (3) for using a look-through method for determining whether a partner was deemed to have a depreciable interest in property held by a partnership; (4) for determining when a contract to acquire a trade or business or an entity is binding; (5) for determining the acquisition date for property not acquired pursuant to a written binding contract; and (6) for components acquired or self-constructed after September 27, 2017, for larger self-constructed property for which manufacture, construction, or production began before September 28, 2017.

On November 10, 2020, the IRS published final regulations in T.D. 9916 which adopted the 2019 proposed regulations with modifications (2020 final regulations). The 2020 final regulations made several modifications to the 2019 proposed regulations as well as to the 2019 final regulations. For example, the 2020 final regulations modified the rules regarding: (1) whether the taxpayer or a predecessor previously had a depreciable interest in (i) used property where the prior use was de minimis, (ii) property acquired in a series of related transactions, and (iii) property acquired by a consolidated group; and (2) components acquired or self-constructed after September 27, 2017, for larger self-constructed property for which manufacture, construction, or production began before September 28, 2017. The 2020 final regulations also withdrew the complex partnership-look thru rule for determining a partner's prior depreciable interest in property held by a partnership. The 2020 final regulations also made a few modifications to the 2019 final regulations. For example, the 2020 final regulations: (1) clarified the application of the 5-year safe harbor for determining if the taxpayer or a predecessor previously had a depreciable interest in used property; (2) clarified the definitions of "predecessor" and "class of property" for basis adjustments under Code Sec. 743; and (3) modified the definition of "qualified improvement property" to reflect the amendments made to Code Sec. 168(e)(6) by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).

Rev. Proc. 2020-50

With the publication of the 2020 final regulations, the IRS determined that guidance is needed for taxpayers that want to apply the 2020 final regulations, the 2019 final regulations, and/or the 2019 proposed regulations retroactively. Accordingly, the IRS issued Rev. Proc. 2020-50, which provides procedures for taxpayers wishing to apply the final regulations or to rely on the 2019 proposed regulations for:

(1) certain depreciable property acquired and placed in service after September 27, 2017, by the taxpayer during its tax years ending on or after September 28, 2017, and before the taxpayer's first tax year that begins on or after January 1, 2021;

(2) certain plants planted or grafted, as applicable, after September 27, 2017, by the taxpayer during its tax years ending on or after September 28, 2017, and before the taxpayer's first tax year that begins on or after January 1, 2021; and

(3) components acquired or self-constructed after September 27, 2017, of certain larger self-constructed property and placed in service by the taxpayer during its tax years ending on or after September 28, 2017, and before the taxpayer's first tax year that begins on or after January 1, 2021.

In addition, if the taxpayer retroactively applies the final regulations, or relies on the 2019 proposed regulations, Rev. Proc. 2020-50 also allows the taxpayer to make a late election under Code Sec. 168(k)(5), Code Sec. 168(k)(7), or Code Sec. 168/(k)(10), or Reg. Sec. 1.168(k)-2(c) of the final regulations or the 2019 proposed regulations, or to revoke an election under Code Sec. 168(k)(5), Code Sec. 168(k)(7), or Code Sec. 168(k)(10), or Reg. Sec. 1.168(k)-2(c) of the 2019 proposed regulations, for the taxpayer's tax years ending on or after September 28, 2017, and before the taxpayer's first tax year that begins on or after January 1, 2021.

Rev. Proc. 2020-50 provides various method change procedures for applying either the 2020 final regulations, the 2019 final regulations, or both the 2019 final regulations and the 2019 proposed regulations. The initial change in determining depreciation is a change from an impermissible to a permissible method of accounting and such change may be made by filing either: (1) a federal amended income tax return or amended Form 1065 for the placed-in-service year of the depreciable property and for the planting year of the specified plant on or before December 31, 2021, but in no event later than the applicable statute of limitations period for the tax year for which the amended return is being filed; or (2) a Form 3115 with the taxpayer's timely filed original federal income tax return or Form 1065 under the automatic change procedures in Rev. Proc. 2015-13, although consent will be granted by the IRS only if the taxpayer satisfies all other applicable requirements in Rev. Proc. 2020-50.

For a discussion of the bonus depreciation rules, see Parker Tax ¶94,200.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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