Qualified improvement property change should prompt taxpayers to act

Editor: Sally P. Schreiber, J.D.

Before the enactment of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136, prior law required qualified improvement property (QIP) placed in service subsequent to Dec. 31, 2017, to use a 39-year tax life, and the property was not eligible for bonus depreciation. The CARES Act retroactively changed this recovery period to 15 years, which makes QIP eligible for bonus depreciation through 2026.

Rev. Proc. 2020-23, which was released on April 8, 2020, allows eligible partnerships the option to file an amended return to make adjustments with respect to their returns, instead of filing an administrative adjustment request (AAR). Eligible partnerships can file amended Forms 1065, U.S. Return of Partnership Income, for tax years that begin in 2018 or 2019 but must do so before Sept. 30, 2020. The CARES Act provided retroactive relief that affects partnerships and, without having this option to file an amended return due to the Bipartisan Budget Act of 2015 (BBA), P.L. 114-74, partnerships that already filed would be required to file an AAR to take advantage of the relief, which could cause a delay instead of providing an immediate benefit to taxpayers.

Subsequently, Rev. Proc. 2020-25 was released on April 17, 2020. It provides additional guidance allowing taxpayers to change the depreciation of QIP placed in service by the taxpayer in a tax year ending in 2018, 2019, or 2020. This guidance relates to the correction of a drafting error in the law known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97. The technical correction is effective as if it had originally been included in the TCJA and applies to all QIP placed in service after 2017. Rev. Proc. 2020-25 allows taxpayers that placed QIP in service in their 2018, 2019, or 2020 tax year the option to file an amended return, AAR, or a Form 3115, Application for Change in Accounting Method, to change their depreciation of QIP placed in service after Dec. 31, 2017, in the taxpayers’ 2018, 2019, or 2020 tax year, to claim the additional depreciation.

In addition, this guidance allows a taxpayer to make a late election, revoke an election, or withdraw an election for the 2018, 2019, or 2020 tax year regarding depreciable property, including the election not to deduct bonus depreciation under Sec. 168(k)(7). However, these procedures do not apply to the real property trade or business election procedures provided for in Rev. Proc. 2020-22 (allowing real property or farming trades or businesses to withdraw their decision to elect out of Sec. 163(j)’s business interest expense limitation for a 2018, 2019, or 2020 tax year) (which is discussed below).

Additional considerations

There are some additional items to consider regarding the new revenue procedures and the associated change of accounting method options that are included. For example, filing a Form 3115 for the 2019 tax year accomplishes a catch-up in that return for the depreciation that should have been claimed in the earlier years but was not taken. If the taxpayer has not yet filed its 2019 tax return, then it can file a Form 3115 with its 2019 return to catch up on the 2018 depreciation via a Sec. 481(a) adjustment. If the 2019 tax return was already filed but has a valid extension, or if the return qualifies for the automatic extension through July 15, 2020, the taxpayer would still be able to file a superseding return and make the method change for 2019. However, if a 2019 return has already been filed and was not subject to an extended due date, the Form 3115 would likely need to be filed with the 2020 income tax return if an amended return is not filed within six months of the original due date under Rev. Proc. 2015-13.

Advisers should consider all of the available options and the client’s individual circumstances when applying the revenue procedures and deciding whether to pursue an amended return, an AAR, or a method of accounting change subject to a Sec. 481 adjustment. Final regulations are expected to be issued this summer to provide more guidance.