On Friday, April 17, 2020, the IRS released Revenue Procedure 2020-25. This guidance explains how taxpayers may now claim accelerated depreciation or bonus depreciation on Qualified Improvement Property (QIP) for tax years 2018-2020. Additionally, the guidance allows taxpayers to make, revoke, or withdraw, for tax years ending in 2018-2020, the following elections:
- Election to use Alternative Depreciation System (ADS)- Section 168(g)(7)
- Additional first year depreciation for certain plants- Section 168(k)(5)
- Election out of bonus depreciation- Section 168(k)(7)
- Election to use 50 percent bonus depreciation- Section 168(k)(10)
This guidance does NOT apply to QIP placed in service by a taxpayer who made a real property trade or business, or farming business election under Section 163(j)(7) (as these taxpayers will claim the increased depreciation on an amended return filed pursuant to Rev. Proc. 2020-22, or QIP for which the taxpayer deducts as an expense the cost or other basis of such property (for example, under Section 179)
Prior to the Coronavirus Aid, Relief, and Economic Security (CARES) Act, QIP was unable to qualify for bonus depreciation because Congress had assigned it a 39 year life in the Tax Cuts and Jobs Act when the original intention was to be 15 years. As part of the CARES Act, a technical amendment was made changing QIP from 39 year to 15 year property retroactively to tax year 2018. In addition, the Alternative Depreciation System (ADS) life was retroactively decreased from 40 years to 20.
There are two ways in which taxpayers can apply this Rev. Proc. to the technical amendment changing the QIP life to 15 years and qualifying QIP for bonus depreciation.
Option 1: The first way is through filing an amended return. Amended returns applying this guidance are due on or before October 15, 2021, but in no case later than the statute of limitations on assessment which is generally three years from the due date of the return. The amended return must include the adjustment to taxable income for the QIP change to depreciation, and any ancillary adjustments. The adjustments must also be made for taxable years after the adjustment that are affected.
A BBA partnership that is temporarily permitted to file amended returns for 2018 and 2019 pursuant to Rev. Proc. 2020-23 must do so by September 30, 2020. A BBA partnership that chooses to instead file an Administrative Adjustment Request (AAR) to claim benefits attributable to 2018 or 2019 must do so before October 15, 2021.
Option 2: The second option involves filing a Form 3115 with a timely-filed tax return and making a 481(a) adjustment on that return as an automatic change. A single Form 3115 may be used if changes are being made to multiple assets. The year of change must go on the Form 3115 per Rev. Proc. 2015-13. The automatic accounting method change number that should be used is 244. Taxpayers applying this Rev. Proc. only need to fill out the following sections of the Form 3115:
- The identification section of page 1 (above Part I);
- The signature section at the bottom of page 1;
- Part I;
- Part II, all lines except lines 11, 12, 13, 15, 16, 17, and 19;
- Part IV, all lines; and
- Schedule E, all lines except lines 1, 4b, 5, and 6.
Generally, an impermissible method of accounting must be treated by the taxpayer consistently for two or more years before it is adopted. This Rev. Proc. allows QIP placed in service only one year before the year of change to be eligible to participate in either filing a Form 3115, or an amended return/AAR.
Finally, taxpayers wanting to make a late election under § 168(g)(7), (k)(5), (k)(7), or (k)(10), to revoke an election under § 168(k)(5), (k)(7), or (k)(10), or to withdraw an election under § 168(g)(7), may treat these as a change in method of accounting with a 481(a) adjustment. Due to the administrative burden of processing amended returns/AARs, the IRS is allowing these changes to be made as temporary accounting method changes. However, taxpayers may still report these changes on amended returns/AARs. These may be reported by filing an amended return/AAR by October 15, 2021, but in no case later than the statute of limitations on assessment which is generally three years from the due date of the return. These are applicable only to tax years 2018-2020.
By: Tony Nitti, CPA, MST
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