IRS Allows Taxpayers to Revoke or Make Late Bonus Depreciation Elections

(Parker Tax Publishing August 2019)

The IRS issued guidance allowing a taxpayer to make a late bonus depreciation election, or to revoke a bonus depreciation election, under Code Sec. 168(k)(5), Code Sec. 168(k)(7), or Code Sec. 168(k)(10), for certain property acquired by the taxpayer after September 27, 2017, and placed in service or planted or grafted, as applicable, by the taxpayer during its tax year that includes September 28, 2017. A late election or the revocation of an election under Rev. Proc. 2019-33 is treated as a change in method of accounting for a limited period of time to which Code Sec. 446(e) and Code Sec. 481, and the corresponding regulations, apply. Rev. Proc. 2019-33.

Background

Before being amended by the Tax Cuts and Jobs Act of 2017 (TCJA), Code Sec. 168(k)(1) allowed a 50 percent additional first year depreciation (i.e., 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.

The TCJA made several amendments to Code Sec. 168(k). For example, the additional first year depreciation deduction percentage was increased from 50 percent to 100 percent; the property eligible for the additional first year depreciation deduction was expanded to include certain used depreciable property and certain film, television, or live theatrical productions; the placed-in-service date was extended from before January 1, 2020, to before January 1, 2027 (from before January 1, 2021, to before January 1, 2028, for property described in Code Sec. 168(k)(2)(B) or Code Sec. 168(k)(2)(C)); and the date on which a specified plant is planted or grafted by the taxpayer was extended from before January 1, 2020, to before January 1, 2027. The TCJA also added Code Sec. 168(k)(10), which allows a taxpayer to elect to deduct 50-percent, instead of 100-percent, additional first year depreciation for qualified property acquired by the taxpayer after September 27, 2017, and placed in service by the taxpayer or planted or grafted, as applicable, during its tax year that includes September 28, 2017. The amendments to Code Sec. 168(k) made by the TCJA apply to property acquired and placed in service after September 27, 2017. However, property is not treated as acquired after the date on which a written binding contract is entered into for such acquisition. The amendments apply to specified plants planted or grafted after September 27, 2017.

The TCJA repealed Code Sec. 168(k)(4), relating to the election to accelerate alternative minimum tax credits in lieu of the additional first year depreciation deduction, for tax years beginning after December 31, 2017, and Code Sec. 168(k)(3), relating to qualified improvement property, for property placed in service after December 31, 2017.

Code Sec. 168(k)(5) allows a taxpayer to elect to deduct additional first year depreciation for any specified plant, as defined in Code Sec. 168(k)(5)(B), that is planted before January 1, 2027, or grafted before that date to a plant that has already been planted, by the taxpayer in the ordinary course of its farming business as defined in Code Sec. 263A(e)(4). The additional first year depreciation deduction is allowable for the specified plant for the tax year in which that specified plant is planted or grafted, and that specified plant is not treated as qualified property under Code Sec. 168(k) in the year the plant is placed in service. Under Code Sec. 168(k)(5)(C), the Code Sec. 168(k)(5) election may be revoked only with the consent of the IRS. Except for the date, the TCJA did not amend Code Sec. 168(k)(5).

The procedures for making the Code Sec. 168(k)(5) election are provided in Rev. Proc. 2017-33. Rev. Proc. 2017-33 provides that, in general, the Code Sec. 168(k)(5) election must be made by the due date, including extensions, of the tax return for the tax year in which the taxpayer plants or grafts the specified plant to which the election applies, and must be made in the manner prescribed on Form 4562, Depreciation and Amortization, and its instructions. The instructions to the 2016 and 2017 Form 4562 provide that the election is made by attaching a statement to the taxpayer's tax return indicating that the taxpayer is electing to apply Code Sec. 168(k)(5) and identifying the specified plant(s) for which the taxpayer is making the election.

Code Sec. 168(k)(7) allows a taxpayer to elect not to deduct additional first year depreciation for all qualified property that is in the same class of property and placed in service by the taxpayer in the same tax year (Code Sec. 168(k)(7) election). Code Sec. 168(k)(7) provides that once made, the Code Sec. 168(k)(7) election may be revoked only with the consent of the IRS. The TCJA did not amend Code Sec. 168(k)(7).

Rev. Proc. 2017-33 provides that rules similar to the rules in Reg. Sec. 1.168(k)-1(e)(3) apply for purposes of Code Sec. 168(k)(7). Reg. Sec. 1.168(k)-1(e)(3) provides the procedures for making the election not to deduct the additional first year depreciation deduction for all qualified property that is in the same class of property and placed in service by the taxpayer in the same tax year. In accordance with Reg. Sec. 1.168(k)-1(e)(3), the Code Sec. 168(k)(7) election must be made by the due date, including extensions, of the tax return for the tax year in which the taxpayer places in service the qualified property, and must be made in the manner prescribed on Form 4562 and its instructions. The instructions to the 2016 and 2017 Form 4562 provide that the election is made by attaching a statement to the taxpayer's return indicating that the taxpayer is electing not to deduct the additional first year depreciation and the class of property for which the taxpayer is making the election.

Code Sec. 168(k)(10), which was added by the TCJA, allows a taxpayer to elect to deduct 50-percent, instead of 100-percent, additional first year depreciation for qualified property acquired after September 27, 2017, by the taxpayer and placed in service or planted or grafted, as applicable, by the taxpayer during its tax year that includes September 28, 2017.

The IRS issued proposed regulations under Code Sec. 168(k) in REG-104397-18 in August of 2018. In comments to the proposed regulations, practitioners requested relief to make late elections under Code Sec. 168(k)(7) or Code Sec. 168(k)(10) for property placed in service during the taxpayer's tax year that includes September 28, 2017, because some taxpayers had already filed their returns for that tax year before the proposed regulations were issued. Practitioners also noted that a taxpayer with a due date (with extensions) of September 15, 2018, or October 15, 2018, for its return for the tax year that includes September 28, 2017, may not have had sufficient time to analyze the proposed regulations to make a timely election under Code Sec. 168(k)(7) or Code Sec. 168(k)(10).

IRS Provides Relief in Rev. Proc. 2019-33

The IRS agreed with the practitioners' comments to the August 2018 proposed regulations requesting relief. In response, the IRS issued Rev. Proc. 2019-33, which is effective July 31, 2019. Rev. Proc. 2019-33 provides procedures for making late elections, or revoking elections, under Code Sec. 168(k)(5), Code Sec. 168(k)(7), or Code Sec. 168(k)(10) for property acquired by a taxpayer after September 27, 2017, and placed in service or planted or grafted, as applicable, by the taxpayer during its tax year that includes September 28, 2017.

In addition, the IRS explained that, because of the administrative burden of filing amended returns, it is appropriate to treat the making of late elections, or the revocation of elections, under Code Sec. 168(k)(5), Code Sec. 168(k)(7), or Code Sec. 168(k)(10) for property acquired by a taxpayer after September 27, 2017, and placed in service or planted or grafted, as applicable, by the taxpayer during its tax year that includes September 28, 2017, as a change in method of accounting with a Code Sec. 481(a) adjustment for a limited period of time.

The relief provided in Rev. Proc. 2019-33 applies to a taxpayer that:

(1) acquired qualified property after September 27, 2017, and placed the property in service during the taxpayer's tax year beginning in 2016 and ending on or after September 28, 2017 (2016 tax year);

(2) acquired qualified property after September 27, 2017, and placed the property in service during the taxpayer's tax year beginning in 2017 and ending on or after September 28, 2017 (2017 tax year); or

(3) planted or grafted a specified plant after September 27, 2017, and during the taxpayer's 2016 tax year or 2017 tax year.

The making of a late election, or the revocation of an election, under Rev. Proc. 2019-33 is treated as a change in method of accounting for a limited period of time to which Code Sec. 446(e) and Code Sec. 481, and the corresponding regulations, apply. A taxpayer that wants to make a late election, or revoke an election, described in Rev. Proc. 2019-33 must use the automatic change procedures in Rev. Proc. 2015-13 or its successor.

Rev. Proc. 2019-33 modifies Rev. Proc. 2018-31, which provides the list of automatic changes to which the automatic change procedures in Rev. Proc. 2015-13 apply, to provide that the IRS will treat the making of a late election, or the revocation of an election under Code Sec. 168(k)(5), Code Sec. 168(k)(7), and Code Sec. 168(k)(10), as a change in method of accounting with a Code Sec. 481(a) adjustment only for the taxpayer's first, second, or third tax year succeeding the taxpayer's 2016 tax year or 2017 tax year. The eligibility rules in Rev. Proc. 2015-13 do not apply to this change for the taxpayer's 2016 tax year or 2017 tax year.

Rev. Proc. 2018-31 is also modified to provide that a taxpayer making the change of accounting method as a result of a late election, or the revocation of an election, under Rev. Proc. 2019-33 for more than one specified plant under Code Sec. 168(k)(5) or more than one class of property under Code Sec. 168(k)(7) for the same year of change must provide a single Code Sec. 481(a) adjustment for all such changes. In addition, a taxpayer making the change for all qualified property under Code Sec. 168(k)(10) should provide a single net Code Sec. 481(a) adjustment for all assets that are qualified property.

Compliance Tip: A taxpayer making a late election, or revoking an election, under more than one section of Rev. Proc. 2019-33 (for example, a Code Sec. 168(k)(5) election and a Code Sec. 168(k)(10) election) for the same year of change should file a single Form 3115 for all such changes. The single Form 3115 must provide a single net Code Sec. 481(a) adjustment for all such changes. The designated automatic accounting method change number for a change to the method of accounting resulting from a late election or revocation of an election under Code Sec. 168(k)(5), Code Sec. 168(k)(7), and Code Sec. 168(k)(10) is "241."

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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