Congress’ recent penchant for letting bonus depreciation expire only to be retroactively reinstated nearly a year later has created issues for many non-calendar year taxpayers.  When their returns are filed assets acquired after January 1 of the year in question are not eligible for bonus depreciation.  However when Congress retroactively extends the application of IRC §168(k) these returns become “erroneous” as filed since bonus depreciation must be used unless the taxpayer elected not to use bonus.

In Revenue Procedure 2016-48 the IRS gives guidance to taxpayers who find they have such “erroneous” returns already on file with the agency due to the passage late last year of the Protecting Taxpayers Against Tax Hikes Act of 2015 (PATH).

Specifically as the IRS notes in the “Purpose” section of the procedure:

This revenue procedure provides guidance for issues related to the enactment of § 124(c)(1), § 143(a)(1), and § 143(a)(3) of the Protecting Americans From Tax Hikes Act of 2015 (PATH Act), enacted as part of the Consolidated Appropriations Act, 2016, Division Q, Pub. L. No. 114-113, 129 Stat. 2242 (December 18, 2015). Section 124(c)(1) of the PATH Act amended § 179(f) of the Internal Revenue Code (Code) by extending the application of § 179(f) from any taxable year beginning after 2009 and before 2015 to any taxable year beginning after 2009 and before 2016. Section 143(a)(1) of the PATH Act amended § 168(k)(2) of the Code by extending the placed-in-service date for property to qualify for the 50-percent additional first year depreciation deduction. Section 143(a)(3) of the PATH Act amended § 168(k)(4) of the Code by allowing corporations to elect not to claim the 50-percent additional first year depreciation deduction for certain property placed in service generally after December 31, 2014, and before January 1, 2016, and instead to increase their alternative minimum tax (AMT) credit limitation under § 53(c) of the Code.

The procedure first looks at the impact of the extension of the qualified real property provisions found at IRC §179(f).  Previously any taxpayer who had unused carryover of such qualified real property deductions as of the last day of the taxpayer’s taxable year beginning in 2014 had to treat that excess as placed in service on the first day of the taxpayer’s first tax year beginning in 2014—that is, it couldn’t be carried into a tax year beginning in 2015.  Under the revised law that excess could be carried into 2015.

The procedure allows a taxpayer that had already filed a return that did not carry that excess into the 2015 tax year to choose to either amend the 2015 to do so or continue to treat that carryover as an asset placed in service in the first tax year beginning in 2014.  The taxpayer must amend the return in question while the statute under §6501(a) is open and remains open for all later affected years.

The IRS provides the following mechanism for those electing to go the amended return route:

The amended federal tax return for the taxpayer's last taxable year beginning in 2014 must include any collateral adjustments to taxable income or tax liability (for example, the amount of depreciation allowed or allowable in the last taxable year beginning in 2014 for the amount of the 2010, 2011, 2012, 2013 or 2014 disallowed § 179 deduction). Such collateral adjustments must also be made on amended federal tax returns for any affected succeeding taxable years. The amended returns for the taxpayer's last taxable year beginning in 2014 and for any affected succeeding taxable years must be filed within the time prescribed by law for filing an amended return for such taxable years.

Bonus depreciation under §168(k) had also ended generally for assets placed in service after December 31, 2014.  Thus, any taxpayer filing returns with tax years ending after December 31, 2014 may have placed in service assets on which no bonus depreciation was claimed (as the law in place at the time did not allow it) but who now wish to claim bonus depreciation. 

As well, some taxpayers who do not want to deal with making the change may be concerned because the law retroactively restored the provision requiring taxpayers who do not wish to use bonus depreciation to opt out of the treatment on their returns.  These taxpayers did not attach an election out of bonus depreciation with their return (as it was not necessary under the law at the time) and may have concerns that the law Congress enacted would require the taxpayers to revise their returns to claim the bonus depreciation or be stuck with a permanent loss of basis for the unclaimed depreciation.

The ruling goes on to deal with these affected taxpayers, granting various options..  The IRS provides the following relief options.

If no election was made to opt out of 50% bonus depreciation, the IRS grants the taxpayer two options to claim the “lost” bonus depreciation.  The first is to amend the tax return for the year in question, claiming the extra depreciation:

An amended federal tax return for the 2014 taxable year or the 2015 short taxable year, as applicable, before the taxpayer files its federal tax return for the first taxable year succeeding the 2014 taxable year or the 2015 short taxable year, as applicable. If the taxpayer has both a 2014 taxable year and a 2015 short taxable year, and has timely filed federal tax returns for both such years, the amended federal tax returns for both the 2014 taxable year and the 2015 short taxable year must be filed before the taxpayer files its federal tax return for the first taxable year succeeding the 2015 short taxable year…

In the alternative, the IRS outlines how to catch up on that lost depreciation via filing a change of accounting method to “catch up” using §481(a) adjustment on either the first or second year following the lost depreciation:

A Form 3115, Application for Change in Accounting Method, under section 6.01 of Rev. Proc. 2016-29, 2016-21 I.R.B. 880, 888, with the taxpayer's timely filed federal tax return for the first or second taxable year succeeding the 2014 taxable year or the 2015 short taxable year, as applicable, if the taxpayer owns the property as of the first day of the year of change (as defined in section 3.19 of Rev. Proc. 2015-13, 2015-5 I.R.B. 419, 429). If the taxpayer has both a 2014 taxable year and a 2015 short taxable year, and has timely filed federal tax returns for both such years, the Form 3115 must be filed with the taxpayer's timely filed federal tax return for the first or second taxable year succeeding the 2015 short taxable year if the taxpayer owns the property as of the first day of the year of change.

If the taxpayer attached an election to “opt-out” of the 50% bonus for the affected assets for the period when the bonus depreciation was not allowed but now wishes to make use of it, the IRS provides the following option:

If, on its timely filed federal tax return for the 2014 taxable year or the 2015 short taxable year, as applicable, a taxpayer made an election within the time and in the manner described in section 2.02(3) of this revenue procedure to not deduct the 50-percent additional first year depreciation for a class of property that is qualified property, the Commissioner grants the taxpayer consent to revoke that election, provided the taxpayer files an amended federal tax return for the 2014 taxable year or the 2015 short taxable year, as applicable, in a manner that is consistent with the revocation of the election and by the later of (1) November 11, 2016, or (2) before the taxpayer files its federal tax return for the first taxable year succeeding the 2014 taxable year or the 2015 short taxable year.

A taxpayer who did not attached the election out of the 50% bonus depreciation for the affected assets will be allowed to make a “deemed election” out of the method under this procedure.  The IRS outlines this option as follows:

…[A] taxpayer that timely filed its federal tax return for the 2014 taxable year or the 2015 short taxable year, as applicable, will be treated as making the election to not deduct the 50-percent additional first year depreciation for a class of property that is qualified property if the taxpayer:

(a) On that return, did not deduct the 50-percent additional first year depreciation for that class of property but did deduct depreciation; and

(b) Does not file an amended federal tax return or a Form 3115 within the time and in the manner provided in section 4.02 or section 4.03 of this revenue procedure, as applicable, to claim the 50-percent additional first year depreciation for the class of property.

The ruling also reminds taxpayers that such elections apply to the class of property in question:

(3) Application. If the taxpayer makes the election under section 4.04(1) [actual election made with original return] or (2) [deemed election made under this revenue procedure as described above] of this revenue procedure for its 2014 taxable year, the election applies to both 2014 qualified property and 2015 qualified property in the same class of property for which the election is made. If the taxpayer makes the election under section 4.04(1) or (2) of this revenue procedure for its 2015 short taxable year, the election applies to 2015 qualified property in the same class of property for which the election is made.

The ruling contains similar provisions for the special treatment available to certain taxpayers who opt of bonus depreciation and increase the taxpayer’s limits for bonus depreciation and the AMT credit, now dealing with “Round 5” property.