IRS Addresses Retroactive Application of Bonus Depreciation Extended by PATH

(Parker Tax Publishing September 2016)

The IRS has issued guidance on how fiscal year taxpayers can retroactively elect to take the 50-percent bonus depreciation deduction for qualified property placed in service during the 2015 portion of fiscal years beginning in 2014. This guidance also applies to calendar year taxpayers with short tax years in 2015. In addition, the guidance addresses carrying over disallowed Code Sec. 179 deductions for qualified real property. Rev. Proc. 2016-48.

Rev. Proc. 2016-48 applies to taxpayers who filed their 2014 returns (or 2015 short year returns) before enactment of the tax extenders bill on December 18, 2015, and is effective on August 26, 2016.

Retroactive Application of 50-Percent Additional First Year Depreciation Deduction

Prior to amendment by the Protecting Americans from Tax Hikes Act of 2015 (PATH), Code Sec. 168(k)(1) allowed a 50-percent additional first year depreciation deduction for qualified property acquired by a taxpayer after 2007 and generally placed in service by December 31, 2014. PATH extended the placed-in-service date to December 31, 2015 (December 31, 2016 in the case of certain property).

Rev. Proc. 2016-48 provides that if a taxpayer did not deduct the 50-percent additional first year depreciation (bonus depreciation) on its return for its tax year beginning in 2014 and ending in 2015 (2014 tax year) or for its tax year of less than 12 months beginning and ending in 2015 (2015 short tax year), and did not make an affirmative election not to deduct the bonus depreciation, the taxpayer may claim the bonus depreciation by filing either:

(1) An amended federal tax return for the 2014 tax year or the 2015 short tax year before the taxpayer files its federal tax return for the first tax year succeeding the 2014 tax year or the 2015 short tax year; or

(2) A Form 3115, Application for Change in Accounting Method, with the taxpayer's tax return for the first or second tax year succeeding the 2014 tax year or the 2015 short tax year if the taxpayer owns the property as of the first day of the year of change.

If a taxpayer made an affirmative election to not deduct the bonus depreciation on its tax return for the 2014 tax year or the 2015 short tax year, the taxpayer may revoke that election provided that the taxpayer files an amended return for the 2014 tax year or the 2015 short tax year in a manner that is consistent with the revocation of the election and by the later of (1) November 11, 2016, or (2) before the taxpayer files its return for the first tax year succeeding the 2014 tax year or the 2014 short tax year.

If the taxpayer makes the retroactive election for its 2014 tax year, the election applies to both 2014 qualified property and 2015 qualified property in the same class of property for which the election is made. If the taxpayer makes the retroactive election for its 2015 short tax year, the election applies to 2015 qualified property in the same class of property for which the election is made.

Carryover of 2010, 2011, 2012, 2013, or 2014 Disallowed Code Section 179 Deduction for Qualified Real Property

Code Sec. 179(a) allows a taxpayer to elect to treat the cost (or a portion of the cost), subject to a dollar limitation, of any Code Sec. 179 property as an expense for the tax year in which the taxpayer places the property in service. Under Code Sec. 179(f), a taxpayer may elect to treat qualified real property as Code Sec. 179 property.

Prior to amendment by PATH, Code Sec. 179(f)(4) provided that a taxpayer that elected to apply Code Sec. 179(f) and elected to expense under Code Sec. 179(a) the cost (or a portion of the cost) of qualified real property placed in service during any tax year beginning in 2010, 2011, 2012, 2013, or 2014 could not carryover to any tax year beginning after 2014 the amount that was disallowed as a Code Sec. 179 deduction under the taxable income limitation of Code Sec. 179(b)(3)(A) (disallowed Code Sec. 179 deduction). Such amounts were required to be treated as an amount for which the Code Sec. 179 election was not made and as property placed in service on the first day of the taxpayer's last tax year beginning in 2014 for purposes of computing depreciation.

Rev. Proc. 2016-48 provides that a taxpayer that treated the amount of a disallowed Code Sec. 179 deduction as property placed in service on the first day of the taxpayer's last tax year beginning in 2014 can either (1) continue that treatment, or (2) if the period of limitations for assessment under Code Sec. 6501(a) is open, amend its return for the last tax year beginning in 2014 to carryover the disallowed Code Sec. 179 deduction to any tax year beginning in 2015.

The amended return must include any collateral adjustments to tax income or the tax liability (for example, the amount of depreciation allowed or allowable in the last tax year beginning in 2014 for the amount of the disallowed Code Sec. 179 deduction). Such collateral adjustments must also be made on amended returns for any affected succeeding tax years.

Round 5 Extension Property

Under Code Sec. 168(k)(4), corporations and certain automotive partnerships can elect for their first tax year ending after March 31, 2008, to accelerate pre-2006 unused research credits or minimum tax credits in lieu of claiming the bonus depreciation allowance. Generally, this election applies to eligible qualified property acquired after March 31, 2008, and placed in service before January 1, 2016.

Rev. Proc. 2016-48 provides guidance on the time and manner for making an election to apply, or to not apply, Code Sec. 168(k)(4) to "round 5 extension property" (i.e. property that is eligible qualified property solely by reason of the extension of Code Sec. 168(k)(2) by PATH).

For a discussion of the bonus depreciation, 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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