In Revenue Procedure 2022-23,[1] the IRS has given guidance on making late elections under IRC sections 168(j), 168(l)(3)(D) and 181(a)(1) which were retroactively extended by Congress to apply to years 2018 and 2019 in the Further Consolidated Appropriations Act, 2020 enacted at the end of 2019.

The IRS describes the impacted provisions in the following paragraph:

In sum, the 2019 Act retroactively extended the application of §§ 168(j) and 168(l) to certain property placed in service by the taxpayer after December 31, 2017, and before January 1, 2021, and § 181 to a qualified film, television, or live theatrical production commencing after December 31, 2017, and before January 1, 2021. Unless otherwise provided, all references hereinafter in this revenue procedure to §§ 168(j), 168(l), and 181 are references to §§ 168(j), 168(l), and 181 as in effect on the day before the enactment date of the 2020 Act.[2]

The provisions impacted were in the following areas:

Non gambling business property on Native American reservations;
Qualifying second-generation biofuel plant property; and
Expensing rules for film, television, and live theater productions.

Elections Impacted

The procedure describes Section 168(j) related to certain property on Native American reservations as follows:

Section 168(j)(1) provides that for purposes of § 168(a), the applicable recovery period for qualified Indian reservation property, as defined in §168(j)(4), is determined in accordance with the table contained in § 168(j)(2), instead of the table contained in § 168(c). Prior to amendment by § 116 of the Taxpayer Certainty and Disaster Tax Relief Act of 2019 (2019 Act), enacted as Division Q of the Further Consolidated Appropriations Act, 2020, Pub. L. No. 116-94, 133 Stat. 2534, 3229 (December 20, 2019), § 168(j)(9) provided that § 168(j) did not apply to property placed in service after December 31, 2017. Section 116(a) of the 2019 Act amended §168(j)(9) to provide that § 168(j) does not apply to property placed in service after December 31, 2020, which made § 168(j) applicable to property placed in service after December 31, 2017, and on or before December 31, 2020. Subsequent legislation further amended § 168(j)(9) to provide that § 168(j) does not apply to property placed in service after December 31, 2021, which made § 168(j) applicable to property placed in service after December 31, 2020, and on or before December 31, 2021. See § 138 of the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (2020 Act), enacted as Division EE of the Consolidated Appropriations Act, 2021, Pub. L. No. 116-260, 134 Stat. 1182, 3054 (December 27, 2020).[3]

Per IRC Section 168(j)(8), a taxpayer may elect to exclude property from the treatment under 168(j). If that election is not timely made, then the taxpayer must apply these rules to the property.

The election is described as follows:

Section 168(j)(8) allows a taxpayer to make an election not to apply § 168(j) for all property that is in the same class of property and placed in service by the taxpayer in the same taxable year (§ 168(j)(8) election). For purposes of § 168(j), the term “class of property” means each class of property described in the table contained in § 168(j)(2) (for example, 3-year property). As set forth in Rev. Proc. 2017-33, 2017-19 I.R.B. 1236, the § 168(j)(8) election generally must be made by the due date, including extensions, of the Federal tax return for the taxable year in which the taxpayer places in service the qualified Indian reservation property. Rev. Proc. 2017-33 further provides that the § 168(j)(8) election generally must be made in the manner prescribed in the instructions for Form 4562, Depreciation and Amortization. The instructions for Form 4562 for the 2018 taxable year and the 2019 taxable year provide that the § 168(j)(8) election is made by attaching a statement to the taxpayer’s timely filed tax return, including extensions, indicating the class of property for which the taxpayer is making the § 168(j)(8) election and, for such class, that the taxpayer is electing not to apply § 168(j).[4]

IRC Section 168(l) provides another special treatment for qualified second generation biofuel property, described as follows:

Section 168(l)(1) allows a 50-percent additional first year depreciation deduction (also sometimes referred to as a “special depreciation allowance”) for qualified second generation biofuel plant property, as defined in §168(l)(2) and (3), for the taxable year in which the qualified second generation biofuel plant property is placed in service by the taxpayer. Prior to amendment by § 130 of the 2019 Act, § 168(l)(2)(D) defined qualified second generation biofuel plant property, in part, as property placed in service by the taxpayer before January 1, 2018. Section 130(a) of the 2019 Act amended § 168(l)(2)(D) by inserting “January 1, 2021” in place of “January 1, 2018,” which made § 168(l)(1) applicable to property placed in service after December 31, 2017, and before January 1, 2021.[5]

Again, a taxpayer may, under IRC Section 168(l)(3)(D), elect not to apply these special rules to property, but unless this election is made in a timely manner the rules must be applied:

Section 168(l)(3)(D) allows a taxpayer to elect not to apply § 168(l) for all property that is in the same class of property and placed in service in the same taxable year (§ 168(l)(3)(D) election). The procedures for making the § 168(l)(3)(D) election are provided in the instructions for Form 4562. The instructions for Form 4562 for the 2018 taxable year and the 2019 taxable year provide that any election not to deduct the additional first year depreciation for any class of property, which includes the § 168(l)(3)(D) election, is made by attaching a statement to the taxpayer’s timely filed tax return, including extensions, indicating the class of property for which the taxpayer is making the § 168(l)(3)(D) election and, for such class, that the taxpayer is not claiming the additional first year depreciation.[6]

Finally, the IRS describes the election to deduct production costs under IRC Section 181:

Section 181(c)(1) provides that the § 181 election for any qualified film, television, or live theatrical production is made in such manner as prescribed by the Secretary of the Treasury or her delegate and by the due date, including extensions, for filing the taxpayer's return of tax under chapter 1 of the Code for the taxable year in which costs of the production are first incurred.

(a) Last updated in 2012, the rules and procedures concerning a § 181 election for qualified film and television productions are set forth in § 1.181-0 through § 1.181-6 (§ 181 regulations). Congress added “qualified live theatrical production” to § 181 of the Code in 2015. As of the date of issuance of this revenue procedure, the § 181 regulations have not been updated to incorporate rules and procedures for qualified live theatrical productions.

(b) Section 1.181-2(a) provides that an owner, as defined in § 1.181-1(a)(2), generally makes the § 181 election to deduct production costs, as defined in § 1.181-1(a)(3), of a production only if that owner has not deducted in a previous taxable year any production costs for that production under any provision of the Code other than § 181. Pursuant to § 1.181-2(b)(1), the § 181 election generally must be made by the due date, including any extension, for filing the owner's Federal income tax return for the first taxable year in which (i) any aggregate production costs, as defined in § 1.181-1(a)(4), have been paid or incurred, and (ii) the owner reasonably expects, based on all of the facts and circumstances, that the production will be set for production and will, upon completion, be a qualified production. Pursuant to § 1.181-2(c)(1), an owner must make the § 181 election separately for each production. Further, for each production to which the § 181 election applies, § 1.181-2(c)(2)(i) provides that the owner must attach a statement to the owner's Federal income tax return for the taxable year of the § 181 election stating that the owner is making the § 181 election and providing the information specified in § 1.181-2(c)(2)(i)(A) through (H). If the owner pays or incurs additional production costs in any taxable year subsequent to the taxable year for which production costs are first deducted under § 181, § 1.181-2(c)(2)(ii) provides that the owner must attach a statement to the owner's Federal income tax return for that subsequent taxable year providing the information specified in § 1.181-2(c)(2)(ii)(A) through (H).[7]

Since these provisions were extended retroactively, well after they had expired, many taxpayers had no ability to make these elections in a timely manner, as the law no longer applied when they filed the return. In other cases, the taxpayers reasonably may not have been aware of the change when a return was filed that could have taken advantage of these provisions.

Another problem is that these rules affect a method of accounting under the tax law. Generally, a taxpayer must have the IRS permission to change an accounting method they had previously adopted. Again, when these returns were filed, these methods of accounting would not have been allowed under the law. Presuming the taxpayer properly prepared the returns in question, the taxpayer would not have used these methods.

But now, the taxpayer is retroactively out of compliance with the law in some cases, but cannot get back in compliance without the IRS permission to change their method. In other cases, the taxpayer may now wish to make an election that is allowed retroactively, but which itself would also amount to an accounting method change. So the taxpayer will also need permission from the IRS to change their accounting method.

This procedure looks to provide relief to taxpayers with respect to these issues. That way taxpayers can take advantage of the options the Congress has decided they should have had when their returns were filed, but which may not have existed or they may not have been aware of the change when the return was filed.

Qualifying Taxpayers

Taxpayers can qualify to take advantage of this procedure by satisfying one of two conditions. The first condition provided for applying the procedure states:

(1) Placed in service (a) qualified Indian reservation property after December 31, 2017, during the taxpayer’s taxable year ending in 2018 (2018 taxable year) or in 2019 (2019 taxable year), or (b) qualified second generation biofuel plant property after December 31, 2017, during the taxpayer’s 2018 taxable year or 2019 taxable year;

(2) Timely filed the taxpayer’s Federal income tax return or Form 1065, U.S. Return of Partnership, for the placed-in-service year of such property; and

(3) Wants to make a (a) late § 168(j)(8) election to not apply § 168(j) for the placed-in-service year for one or more classes of qualified Indian reservation property, or (b) late § 168(l)(3)(D) election not to apply § 168(l) for the placed-in-service year for one or more classes of qualified second generation biofuel plant property.[8]

The second set of conditions provided for taxpayers to use these relief provisions states:

(1) Is the owner, as defined in § 1.181-1(a)(2), of a qualified film, television, or live theatrical production commencing after December 31, 2017;

(2) Wants to make a late § 181 election for the production costs of such qualified film, television, or live theatrical production for the taxpayer’s 2018 taxable year or 2019 taxable year, as applicable; and

(3) Timely filed the taxpayer’s Federal income tax return or Form 1065 for the taxpayer’s 2018 taxable year or 2019 taxable year, as applicable.[9]

Relief for Making Late Elections Under Sections 168(j)(8), 168(l)(3)(D) and 181(a)(1)

The Revenue Procedure gives the taxpayer two options for making a late election under section 168(j)(8) or section 168(l)(3)(D) to avoid the special treatments noted above. The taxpayer may file either:

An amended Federal income tax return or amended Form 1065 for the placed-in-service year of the property on or before December 31, 2022, but in no event later than the applicable period of limitations on assessment for the taxable year for which the amended return is being filed. A partnership subject to the centralized partnership audit regime enacted as part of the Bipartisan Budget Act of 2015 (BBA partnership) may file an AAR for the placed-in-service year of the property on or before December 31, 2022, but in no event later than the applicable period of limitations on making adjustments under § 6235 of the Code for the reviewed year as defined in § 301.6241-1(a)(8) of the Procedure and Administration Regulations. This amended return or AAR must include the adjustment to taxable income for the late election and any collateral adjustments to taxable income or to tax liability. Such collateral adjustments also must be made on original or amended Federal returns or AARs for any affected succeeding taxable years; or
A Form 3115 with the taxpayer’s first or second timely filed original Federal income tax return or Form 1065 that is filed after April 19, 2022. A late § 168(j)(8)(2) A Form 3115 with the taxpayer’s first or second timely filed original Federal income tax return or Form 1065 that is filed after April 19, 2022. A late § 181 election made pursuant to this section 4.02(2) will be treated as a change in method of election or late § 168(l)(3)(D) election made pursuant to this section 4.01(2) will be treated as a change in method of accounting with a § 481(a) adjustment. The procedures for making this change in method of accounting are described in section 6 of this revenue procedure.[10]

Taxpayers looking to make late elections under section 181 are also given two very similar choices for how to approach the issue. The taxpayers may either file:

An amended Federal income tax return or amended Form 1065 for the taxpayer’s 2018 taxable year or 2019 taxable year, as applicable, on or before December 31, 2022, but in no event later than the applicable period of limitations on assessment for the taxable year for which the amended return is being filed. A BBA partnership may file an AAR for the taxpayer’s 2018 taxable year or 2019 taxable year, as applicable, on or before December 31, 2022, but in no event later than the applicable period of limitations on making adjustments under § 6235 for the reviewed year as defined in § 301.6241-1(a)(8). This amended return or AAR must include the adjustment to taxable income for the late election, any collateral adjustments to taxable income or to tax liability, and the statement required under § 1.181-2(c)(2)(i). Such collateral adjustments also must be made on, and the statement required under § 1.181-2(c)(2)(ii) must be included with, original or amended Federal returns or AARs for any affected succeeding taxable years; or
A Form 3115 with the taxpayer’s first or second timely filed original Federal income tax return or Form 1065 that is filed after April 19, 2022. A late § 181 election made pursuant to this section 4.02(2) will be treated as a change in method of accounting with a § 481(a) adjustment. The procedures for making this change in method of accounting are described in section 6 of this revenue procedure.[11]

Treating Live Theatrical Productions as if the Section 181 Regulations Had Been Amended to Apply to Such Productions

A special rule is provided for applying the regulations under section 181 to live theatrical productions:

A taxpayer within the scope of this revenue procedure may treat the § 181 regulations (as described in section 2.02(3) of this revenue procedure) as if such regulations were amended to apply to the production costs of qualified live theatrical productions for purposes of making the late § 181 election under section 4.02 of this revenue procedure for the taxpayer's 2018 taxable year or 2019 taxable year.[12]

Automatic Change of Accounting Method Added

The procedure concludes by adding a new automatic change of accounting method provision to Revenue Procedure 2022-14. The new provision is to be added to section 6.23 and reads as follows:

6.23 Late elections under § 168(j)(8), § 168(l)(3)(D), and § 181(a)(1).

(1) Description of Change.

(a) Applicability. This change applies to:

(i) A taxpayer within the scope of section 3.01 of Rev. Proc. 2022-23, 2022-18 I.R.B. XXX, that wants to make the late election provided in section 4.01(2) of Rev. Proc. 2022-23 under § 168(j)(8) or § 168(l)(3)(D); or

(ii) A taxpayer within the scope of section 3.02 of Rev. Proc. 2022-23 that wants to make the late election provided in section 4.02(2) of Rev. Proc. 2022-23 under § 181(a)(1).

(b) Inapplicability. The IRS will treat the making of a late election provided in section 4 of Rev. Proc. 2022-23 under §§ 168(j)(8), 168(l)(3)(D), and 181(a)(1) as a change in method of accounting with a § 481(a) adjustment only for the taxable years specified in section 6.23(2) of this revenue procedure. This treatment does not apply to a taxpayer that makes these late elections before or after the time specified in section 6.23(2) of this revenue procedure, and any such late election is not a change in method of accounting.

(2) Time for making the change. The change under section 6.23(1)(a)(i) or (ii) of this revenue procedure must be made with the taxpayer's first or second timely filed original Federal income tax return or Form 1065, as applicable, that is filed after April 19, 2022.

(3) Certain eligibility rules inapplicable. The eligibility rules in section 5.01(1)(d) and (f) of Rev. Proc. 2015-13, 2015-5 I.R.B. 419, do not apply to a change under section 6.23(1)(a)(i) or (ii) of this revenue procedure.

(4) Certain audit protection exception temporarily inapplicable. Sections 8.02(1) and (7) of Rev. Proc. 2015-13 do not apply to a change in method of accounting made under section 6.23(1)(a)(i) or (ii) of this revenue procedure. However, sections 8.02(1) and (7) of Rev. Proc. 2015-13 continue to apply for purposes of determining the § 481(a) adjustment period provided in section 7.03(3)(b) of Rev. Proc. 2015-13.

(5) Short Form 3115.

(a) A taxpayer making a change under section 6.23(1)(a)(i) of this revenue procedure is required to complete only the following information on Form 3115 (Rev. December 2018):

(i) The identification section of page 1 (above Part I);

(ii) The signature section at the bottom of page 1;

(iii) Part I;

(iv) Part II, lines 6, 7, 8, 9, 14, and 18;

(v) Part IV, all lines except line 25; and

(vi) Schedule E, all lines except lines 1, 4b, 5, and 6.

(b) A taxpayer making the change under section 6.23(1)(a)(ii) of this revenue procedure is required to attach to the taxpayer's Form 3115 the statement required under § 1.181-2(c)(2)(i) and, if applicable, the statement required under § 1.181-2(c)(2)(ii), and to complete only the following information on Form 3115 (Rev. December 2018):

(i) The identification section of page 1 (above Part I);

(ii) The signature section at the bottom of page 1;

(iii) Part I;

(iv) Part II, lines 6, 7, 8, 9, 14, and 18; and

(v) Part IV, all lines except line 25.

(6) Concurrent automatic change. A taxpayer making one or more late elections under section 4.01(2) or 4.02(2) of Rev. Proc. 2022-23 for the same year of change should file a single Form 3115 for all such changes. The single Form 3115 must provide a single net § 481(a) adjustment for all such changes. See section 6.03(1)(b) of Rev. Proc. 2015-13 for information on making concurrent changes.

(7) Designated automatic accounting method change number. The designated automatic accounting method change number for a change to the method of accounting under this section 6.23 is “264.”

(8) Contact information. For further information regarding a change under this section 6.23, contact James Liechty at (202) 317-7005 (not a toll-free number).[13]

[1] Revenue Procedure 2022-23, April 19, 2022, https://www.taxnotes.com/research/federal/irs-guidance/revenue-procedures/guidance-addresses-late-elections-under-extended-tax-provisions/7ddfl (retrieved April 20, 2022)

[2] Revenue Procedure 2022-23, April 19, 2022

[3] Revenue Procedure 2022-23, April 19, 2022

[4] Revenue Procedure 2022-23, April 19, 2022

[5] Revenue Procedure 2022-23, April 19, 2022

[6] Revenue Procedure 2022-23, April 19, 2022

[7] Revenue Procedure 2022-23, April 19, 2022

[8] Revenue Procedure 2022-23, April 19, 2022

[9] Revenue Procedure 2022-23, April 19, 2022

[10] Revenue Procedure 2022-23, April 19, 2022

[11] Revenue Procedure 2022-23, April 19, 2022

[12] Revenue Procedure 2022-23, April 19, 2022

[13] Revenue Procedure 2022-23, April 19, 2022