The IRS has granted relief related to last minute decisions taxpayers had to make regarding bonus depreciation following the passage of the Tax Cuts and Jobs Act. For the tax year that contained September 28, 2017 (the first day the new 100% bonus depreciation applied), the IRS will allow taxpayers to make or revoke elections related the various bonus depreciation issues. The relief is provided in Revenue Procedure 2019-33.[1]

The affected elections are:

Election to deduct additional first year depreciation on certain plants (IRC §168(k)(5));
Election to not deduct additional first year depreciation for any class of qualified property placed in service during the year (IRC §168(k)(7)); and
Election to allow the taxpayer, for certain qualified property, to elect to deduct 50-percent, rather than 100-percent, additional first year depreciation for the tax year that includes September 28, 2018 (§168(k)(10).[2]

The revenue procedure applies to taxpayers that:

Acquired qualified property after September 27, 2017, and placed in service such property during the taxpayer’s taxable year beginning in 2016 and ending on or after September 28, 2017 (2016 taxable year);
Acquired qualified property after September 27, 2017, and placed in service such property during the taxpayer’s taxable year beginning in 2017 and ending on or after September 28, 2017 (2017 taxable year); or
Planted or grafted a specified plant after September 27, 2017, and during the taxpayer’s 2016 taxable year or 2017 taxable year.[3]

The ruling then takes a look at each specific election and the type of relief granted.

Bonus Depreciation on Qualified Plants Election Under §168(k)(5)

For taxpayers who had a specified plant that was planted or grafted after September 27, 2017 in a covered year, the procedure provides for the following relief:

A taxpayer who did not follow the specific steps outlined in Rev. Proc. 2017-33 (the initial IRS guidance on electing bonus depreciation on qualified plants) will still be treated as having made a valid election to claim bonus depreciation on the plants if:
- On the return the taxpayer claimed 100% bonus depreciation on the the plant or, if the taxpayer elected to use 50% bonus in lieu of 100% bonus by electing under IRC §168(k)(10), by claiming 50% bonus depreciation on the plant and
- Does not revoke that election under this same revenue procedure.[4]
If the taxpayer timely filed its tax return for the affected year, did not deduct either bonus depreciation amount on such plants and did not make the §168(k)(5) election to take bonus depreciation on such plants, the taxpayer may make a late election by either
- Filing an amended return (or administrative adjustment request (AAR) for a partnership subject to the centralized partnership audit regime) for the affected year before filing a tax return for the subsequent year or
- Filing a Form 3115, Application for Change in Accounting Method, with the taxpayer’s timely filed tax return for the first, second or third year succeeding the affected year. The late election will be treated as a change of method solely during this period and a §481(a) adjustment will be available.[5]
If the taxpayer, on its timely filed tax return for the affected year, made the §168(k)(5) election under Revenue Procedure 2017-33, the taxpayer may revoke the election by either:
- Filing an amended return (or administrative adjustment request (AAR) for a partnership subject to the centralized partnership audit regime) for the affected year before filing a tax return for the subsequent year or
- Filing a Form 3115, Application for Change in Accounting Method, with the taxpayer’s timely filed tax return for the first, second or third year succeeding the affected year. The late election will be treated as a change of method solely during this period and a §481(a) adjustment will be available.[6]

Example

Late Election Made Via Amended Return

Angie Agriculture, Inc., an S corporation, did not make the §168(k)(5) election to claim bonus depreciation on qualified plants on its 2017 income tax return. Once it had time to review the proposed regulations, the corporation determined that it should have made the election.

As of July 31 (the date of the Revenue Procedure) Angie Agriculture had not yet filed its 2018 S corporation income tax return. Angie had filed for an extension of time to file its return for 2018. Angie prepares and amended S corporation return for 2017 to make this election following the revenue procedure and distributes amended K-1s to its shareholders for 2017. On the amended return it recalculates the depreciation to claim the 100% bonus depreciation.

Example

Late Election as a Change in Accounting Method (Form 3115)

Assume the same facts except Angie Agriculture had filed its 2018 tax return on March 15, 2019. Since the return for the year following the affected year (2018) has already been filed, the time for amending the 2017 return has passed.

However, Angie Agriculture, Inc. will be allowed to make an automatic accounting method election change on its 2019 return. Assuming that Angie elects to use 100% bonus depreciation on the qualified plants from 2017, the adjusted basis of the plants as of the end of 2018 will be the §481(a) adjustment (change in taxable in in the prior years if the election had been made originally). Since the adjustment is negative (a reduction of income), the entire balance will be deductible on the 2019 return.

Angie Agriculture will be required to attach a Form 3115 to its 2019 return, as well as send a copy to the address provided in the instructions to the Form 3115. The corporation will also need to follow the steps outlined in Section 7 of this revenue procedure for obtaining the automatic consent to a change in method.

Election Not to Deduct Additional First Year Depreciation Under §168(k)(7)

The procedures for making a late election not to claim additional first year depreciation under IRC §168(k)(7) has similar steps to allow a taxpayer to either make or revoke the election.

The revenue procedure applies to the treatment in the tax year of the taxpayer that includes September 28, 2017.

The following options are available to taxpayers:

Deemed Election – If the taxpayer did not make the §168(k)(7) election to not claim bonus depreciation on a class of assets for the year that included September 30, 2017, the taxpayer will be treated as making the election if:
- On the timely filed affected return the taxpayer did not claim the 100% bonus depreciation on the class of property;
- Did not revoke a §168(k)(7) election for the class of property under this revenue procedure; and
- Did not make the election under §168(k)(10) (option to claim the reduced 50% depreciation) for the affected year under this revenue procedure.[7]
Making a Late §168(k)(7) Election – This option is available to taxpayers who timely filed its affected year return and who initially claimed the 100% bonus depreciation on affected property. Such taxpayers may make a late §168(k)(7) election to not claim the bonus depreciation by either:
- Filing an amended return (or administrative adjustment request (AAR) for a partnership subject to the centralized partnership audit regime) for the affected year before filing a tax return for the subsequent year taking into account the removal of the bonus depreciation or
- Filing a Form 3115, Application for Change in Accounting Method, with the taxpayer’s timely filed tax return for the first, second or third year succeeding the affected year. The late election will be treated as a change of method solely during this period and a §481(a) adjustment will be available.[8]
Consent to Revoke a §168(k)(7) Election - This option is available to taxpayers who timely filed its affected year return and who initially made the election to waive bonus depreciation on at least one class of property. The election may be revoked by either
- Filing an amended return (or administrative adjustment request (AAR) for want a partnership subject to the centralized partnership audit regime) for the affected year before filing a tax return for the subsequent year taking into account the removal of the bonus depreciation or
- Filing a Form 3115, Application for Change in Accounting Method, with the taxpayer’s timely filed tax return for the first, second or third year succeeding the affected year. The late election will be treated as a change of method solely during this period and a §481(a) adjustment will be available.[9]

Election Under §168(k)(10) to Claim 50% Bonus Depreciation

The final category of relief available is for taxpayers who want to change the choice the entity made or failed to make with regard to electing to claim 50% bonus depreciation rather than the 100% bonus depreciation on property placed in service after September 27, 2017. Again, the affected year will be the taxpayer’s tax year that includes September 28, 2017.

As with the prior two issues, the following options are available to qualified taxpayers:

Deemed Election – If the taxpayer did not make the §168(k)(10) election to claim 50% bonus depreciation in lieu of 100% on qualified property for the year that included September 30, 2017, the taxpayer will be treated as making the election if:
- On the timely filed affected return the taxpayer did claimed only 50% bonus depreciation on qualified property; and
- Did not revoke a §168(k)(10) election under this revenue procedure.[10]
Making a Late §168(k)(10) Election – This option is available to taxpayers who timely filed its affected year return and who initially claimed the 100% bonus depreciation on affected property. Such taxpayers may make a late §168(k)(10) election to reduce bonus depreciation to 50% on qualified property by either:
- Filing an amended return (or administrative adjustment request (AAR) for a partnership subject to the centralized partnership audit regime) for the affected year before filing a tax return for the subsequent year taking into account the adjustment of the bonus depreciation or
- Filing a Form 3115, Application for Change in Accounting Method, with the taxpayer’s timely filed tax return for the first, second or third year succeeding the affected year. The late election will be treated as a change of method solely during this period and a §481(a) adjustment will be available.[11]
Consent to Revoke a §168(k)(10) Election - This option is available to taxpayers who timely filed its affected year return and who initially made the election to reduce bonus depreciation on qualified property to 50%. The election may be revoked by either
- Filing an amended return (or administrative adjustment request (AAR) for want a partnership subject to the centralized partnership audit regime) for the affected year before filing a tax return for the subsequent year taking into account the adjustment of the bonus depreciation or
- Filing a Form 3115, Application for Change in Accounting Method, with the taxpayer’s timely filed tax return for the first, second or third year succeeding the affected year. The late election will be treated as a change of method solely during this period and a §481(a) adjustment will be available.[12]

Change in Method of Accounting Procedures

The procedure concludes with information on the automatic accounting change procedures for those organizations who use that method of handling these election changes. The standard automatic change procedures found in Rev. Proc. 2015-13 that cover automatic changes will apply to changes under this procedure as well.[13]

A new automatic change, with a designated automatic accounting change number (DCN) of 241 is added by the procedure.[14] Taxpayers are directed to make all changes under this procedure using a single Form 3115 and provide a single combined net §481(a) adjustment for all of the changes.[15]

For this change, the following will not make the taxpayer ineligible to make an automatic change:

The year of change would be the final year of the trade or business; and
The taxpayer had made a request or actually changed its method for the affected items in the prior five years.[16]

[1] https://www.irs.gov/pub/irs-drop/rp-19-33.pdf, July 31, 2019, retrieved July 31, 2019

[2] Ibid, p. 1

[3] Ibid, p. 7

[4] Ibid, p.8

[5] Ibid, p. 8-9

[6] Ibid, p. 10

[7] Ibid, p. 12-13

[8] Ibid, p. 13

[9] Ibid, p. 14

[10] Ibid, p. 16

[11] Ibid, pp. 16-17

[12] Ibid, p. 14

[13] Ibid, p. 19

[14] Ibid, p. 19

[15] Ibid, p. 20

[16] Ibid