How to take retroactive 100% bonus depreciation on QIP

The IRS issued procedures Friday for how taxpayers can take advantage of the recently enacted technical correction to the rules for qualified improvement property (QIP) (Rev. Proc. 2020-25). Qualified improvement property was unintentionally classified, under the law known as the Tax Cuts and Jobs Act, P.L. 115-97, as nonresidential real property, which does not qualify for bonus depreciation. The Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136, fixed this mistake — the so-called retail glitch — by making QIP 15-year property so it qualifies for bonus depreciation retroactively to 2017. Friday’s guidance explains how taxpayers can change their depreciation under Sec. 168(e) for QIP placed in service after Dec. 31, 2017, in a tax year ending in 2018, 2019, or 2020 to take advantage of the fix.

Under Rev. Proc. 2020-25, certain taxpayers can elect to take 100% bonus depreciation on the qualified improvement property by filing an amended return, an administrative adjustment request (AAR) under Sec. 6227, 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.

The revenue procedure also allows a taxpayer to make a late election, or to revoke or withdraw an election, under Sec. 168(g)(7), (k)(5), (k)(7), or (k)(10) for the 2018, 2019, or 2020 tax year, for property placed in service by the taxpayer during its 2018, 2019, or 2020 tax year, for a limited period. Because of the administrative burden of filing amended returns and AARs, the IRS has determined that it is appropriate to treat the making of a late election under Sec. 168(g)(7), (k)(5), (k)(7), or (k)(10), or the revocation of the revocable election under Sec. 168(k)(5), (k)(7), or (k)(10), for property placed in service by taxpayers during their 2018, 2019, or 2020 tax years, as a change in method of accounting with a Sec. 481(a) adjustment for a limited period of time.

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— Sally P. Schreiber, J.D., (Sally.Schreiber@aicpa-cima.com) is a Tax Adviser senior editor.