IRS allows taxpayers to change their minds on bonus depreciation

The IRS will permit taxpayers to change their bonus depreciation treatment for property acquired after Sept. 27, 2017, and placed in service during a tax year that includes Sept. 28, 2017, it announced on July 31 (Rev. Proc. 2019-33). This relief is being granted in response to comments received about the Sec. 168(k) proposed regulations issued in August 2018 (REG-104397-18). After the August 2018 proposed regulations were issued, some taxpayers requested relief to make late elections for property placed in service during tax years that included Sept. 28, 2017, because they had already filed their federal returns for that tax year before the proposed regulations were issued or did not have time to analyze the effect of the proposed regulations and make a timely election.

Sec. 168(k) was amended by the law known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97, to increase the bonus depreciation percentage from 50% to 100% for qualified property and to modify the definition of property that is considered to be qualified. The TCJA allows businesses to immediately deduct 100% of the cost of eligible property in the year it is placed in service, through 2022. The amount of allowable bonus depreciation is then phased down over four years: 80% will be allowed for property placed in service in 2023, 60% in 2024, 40% in 2025, and 20% in 2026. (For certain property with long production periods, the above dates will be pushed out a year.) Bonus depreciation is also allowable for specified plants planted or grafted after Sept. 27, 2017, and before Jan. 1, 2027.

The TCJA also removed the rule that made bonus depreciation available only for new property and extended the period in which certain other property (including plants and films, television, and live theatrical productions) will qualify for 100% depreciation. These new rules generally apply retroactively to property acquired or placed in service after Sept. 27, 2017 (the TCJA was enacted Dec. 22, 2017).

Rev. Proc. 2019-33 allows a taxpayer to make a late election, or to revoke an election, under Sec. 168(k)(5), (7), or (10) for certain property acquired by the taxpayer after Sept. 27, 2017, and placed in service or planted or grafted, as applicable, by the taxpayer during its tax year that includes Sept. 28, 2017. Sec. 168(k)(5) allows a taxpayer to elect to deduct additional first-year depreciation for certain plants. Sec. 168(k)(7) allows a taxpayer to elect not to deduct additional first-year depreciation for any class of qualified property placed in service by the taxpayer during the tax year to which the election applies. Sec. 168(k)(10) allows a taxpayer to elect to deduct 50%, instead of 100%, additional first-year depreciation for certain ­qualified property.

Taxpayers may make the late elections or revocations of elections provided in the revenue procedure by filing amended returns or, for taxpayers that are partnerships subject to the centralized partnership audit regime, by filing an administrative adjustment request, for the 2016 tax year or the 2017 tax year before they file their federal tax return for the first tax year succeeding the 2016 tax year or the 2017 tax year.

In the alternative, taxpayers may file a Form 3115, Application for Change in Accounting Method, with their timely filed federal tax return for the first, second, or third tax year succeeding the 2016 tax year or the 2017 tax year. Late elections or revocations under this revenue procedure will be treated as automatic changes in method of accounting with a Sec. 481(a) adjustment only during this limited period of time.