Insights and Resources
IRS issues procedures to apply bonus regulations retroactively
TAX ALERT |
Authored by RSM US LLP
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.
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.
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.
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.
Call us at +1 213.873.1700, email us at email@example.com or fill out the form below and we'll contact you to discuss your specific situation.
This article was written by Christian Wood, Tracy Watkins, John Charin and originally appeared on 2020-11-09.
2020 RSM US LLP. All rights reserved.
The information contained herein is general in nature and based on authorities that are subject to change. RSM US LLP 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. RSM US LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. 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.
RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each is separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/about us for more information regarding RSM US LLP and RSM International. The RSM logo is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.
Vasquez & Company LLP is a proud member of the RSM US Alliance, a premier affiliation of independent accounting and consulting firms in the United States. RSM US Alliance provides our firm with access to resources of RSM US LLP, the leading provider of audit, tax and consulting services focused on the middle market. RSM US LLP is a licensed CPA firm and the U.S. member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.
Our membership in RSM US Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise and technical resources.
For more information on how Vasquez & Company LLP can assist you, please call +1 213.873.1700.
Subscribe to receive important updates from our Insights and Resources.