It’s not often you see a private letter ruling asking for permission to make a late election to not deduct bonus depreciation under IRC §168(k), but even less often do we see eleven virtually identical requests for that ruling issued in the same week.  But, beginning with PLR 202328007[1] that’s what we saw this week.

Electing Out of Bonus Depreciation

Although bonus depreciation may appear advantageous for most taxpayers, there are scenarios where it may be in their best interest to opt out of claiming it. Under IRC §168(k), taxpayers have the option to elect to forego the utilization of bonus depreciation on a class-by-class basis.

(7) Election out. If a taxpayer makes an election under this paragraph with respect to any class of property for any taxable year, paragraphs (1) and (2)(F) shall not apply to any qualified property in such class placed in service during such taxable year. An election under this paragraph may be revoked only with the consent of the Secretary.

The manner for making this election is provided in Regulation §1.168(k)-2(f)(1)(iii)(B):

(B) Manner of making election. Except as provided in paragraph (f)(6) of this section, any election specified in paragraph (f)(1)(i) of this section must be made in the manner prescribed on Form 4562, “Depreciation and Amortization,” and its instructions. The election is made separately by each person owning qualified property (for example, for each member of a consolidated group by the common parent of the group, by the partnership (including a lower-tier partnership; also including basis adjustments in the partnership assets under section 743(b)), or by the S corporation). If Form 4562 is revised or renumbered, any reference in this section to that form shall be treated as a reference to the revised or renumbered form.

Paragraph (f)(6) only applied to property placed in service in 2016 and 2017, so is no longer of relevance for current elections. 

To make this election, the instructions to Form 4562 require taxpayers to attach a statement to their tax return.

To make an election, attach a statement to your timely filed return (including extensions) indicating the class of property for which you are making the election and that, for such class, you are not to claim any special depreciation allowance.[2]

Indeed, while the step of attaching a statement to the tax return to make this election may appear straightforward, it is absolutely necessary as emphasized in the regulations. Failure to comply with this requirement will result in the election not being valid.

If a tax return is filed without the required election attached, the taxpayer does have the opportunity to be granted automatic permission to make a late election. This option remains available until the date that is six months from the original unextended due date of the tax return.[3]  The instructions provide:

If you timely filed your return without making an election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Enter “Filed pursuant to section 301.9100-2” on the amended return.[4]

In the event that the issue is not identified until after the deadline specified in Regulation §301.9100-2, taxpayers still have the option to seek relief under Regulations §§301-9100-1 and 301.9100-3. It’s important to note that the deadline for filing the election is determined by IRS regulations rather than the statute, as the IRS retains the authority to grant late filing relief broadly only for regulatory elections. However, in order to obtain such relief, the taxpayer must file a request for and pay the necessary user fee to acquire a private letter ruling.

This taxpayer found themselves in the situation described above.

Facts of the Ruling

The taxpayer in this ruling is a partnership which filed a Form 1065 for the year in question.

In its taxable year ending on Date1, Taxpayer placed in service qualified property, as defined in § 168(k)(2). Taxpayer determined that it would make the election under § 168(k)(7) to forego the additional first year depreciation deduction for all classes of qualified property placed in service during that taxable year.[5]

But when it came time to prepare the tax return, the taxpayer failed to attach that simple required statement to the tax return:

Taxpayer engaged Firm to prepare and file its Form 1065 for the taxable year ending on Date1. Taxpayer relied on Firm to properly determine, prepare, and submit the requisite submissions to implement its determination to elect not to deduct additional first year depreciation for all classes of qualified property. Taxpayer provided to Firm the necessary information to properly complete the Form 1065 for the taxable year ending on Date1.

Taxpayer timely filed its Form 1065 for the taxable year ending on Date1. Firm properly calculated taxable income on this federal income tax return to reflect Taxpayer’s decision to elect not to deduct additional first year depreciation for all classes of qualified property placed in service in the taxable year ending Date1. However, Firm inadvertently failed to attach the required election statement to the return. Taxpayer discovered the missed election after the extended due date of this return.[6]

Consequently, the taxpayer proceeded to make the following request for a private letter ruling:

Taxpayer requests an extension of time pursuant to §§ 301.9100-1 and 301.9100-3 to make the election under § 168(k)(7) not to deduct the additional first year depreciation under § 168(k) for all classes of qualified property placed in service by Taxpayer during the taxable year ending on Date1.[7]

The standard that must be met to obtain this relief is outlined in the ruling:

Section 301.9100-3(a) provides that requests for relief under § 301.9100-3 will be granted when the taxpayer provides evidence to establish to the satisfaction of the Commissioner that the taxpayer acted reasonably and in good faith, and the grant of relief will not prejudice the interests of the government.[8]

Although the standard for granting such elections is somewhat ambiguous, the IRS generally tends to approve them if it appears that the taxpayer is not gaining an undue advantage solely by making the election after the required date. This is especially true if there is evidence indicating that the taxpayer had the intention to make the election but inadvertently omitted it from the return.

The good news is that this particular situation aligns well with the circumstances in which relief is likely to be granted. However, it’s important to note that there will be costs involved, including the user fee required to obtain the ruling, as well as professional fees associated with guiding the request through the process. In this case, it appears likely that the firm responsible for preparing the return would be responsible for bearing these expenses.

IRS Ruling

As expected, the taxpayer obtained the requested relief:

Based solely on the facts and representations submitted, we conclude that the requirements of §§ 301.9100-1 and 301.9100-3 have been satisfied. Accordingly, Taxpayer is granted an extension of 60 calendar days from the date of this letter ruling to make the election not to deduct the additional first year depreciation under § 168(k) for all classes of qualified property placed in service by Taxpayer during the taxable year ending Date1. This election must be made by Taxpayer filing an amended Federal income tax return for the taxable year ending Date1, with a statement indicating that Taxpayer is electing not to deduct the additional first year depreciation for all classes of qualified property placed in service by Taxpayer during that taxable year.[9]

[1] PLR 202328007, July 14, 2023, https://www.irs.gov/pub/irs-wd/202328007.pdf (retrieved July 14, 2023)

[2] 2022 Instructions for Form 4562, Depreciation and Amortization (Including Information on Listed Property), p. 6, https://www.irs.gov/pub/irs-pdf/i4562.pdf (retrieved July 14, 2023)

[3] Reg. 301.9100-2

[4] 2022 Instructions for Form 4562, Depreciation and Amortization (Including Information on Listed Property), p. 6

[5] PLR 202328007, July 14, 2023

[6] PLR 202328007, July 14, 2023

[7] PLR 202328007, July 14, 2023

[8] PLR 202328007, July 14, 2023

[9] PLR 202328007, July 14, 2023