Morris Manning & Martin, LLP

New IRS Revenue Procedure Allows Taxpayers to Change Their Bonus Depreciation Treatment

08.07.2019

The IRS issued Rev. Proc. 2019-33 on July 31, 2019, which permits taxpayers to change their previous treatment of property eligible for so-called “bonus” depreciation that was acquired and placed in service by the taxpayer after September 28, 2017 for the tax year that includes September 28, 2017 (i.e., the 2017 tax year for calendar year taxpayers).

Background

As a part of the Tax Cuts and Jobs Act (TCJA), Section 168(k) was amended to allow 100% bonus depreciation on qualified property (generally, property with a depreciable life of 20 years or less that was acquired by the taxpayer), resulting in an immediate deduction of the full basis for the depreciable property for taxpayers. For the 2017 tax year, taxpayers could also choose to have the pre-TCJA bonus depreciation rules apply, allowing a 50% bonus depreciation deduction for qualified property.

In August 2018, Treasury released proposed regulations under Section 168(k) providing that taxpayers were required to take full bonus depreciation for the year unless they made an affirmative election out of the default TCJA bonus depreciation rules.

Prior to issuance of Rev. Proc. 2019-33, a taxpayer’s only option to change a bonus depreciation election would have been to go through a burdensome administrative procedure known as “9100 Relief.” Given that many taxpayers had either already filed their tax returns for the 2017 tax year or would not have enough time to analyze the proposed regulations under Section 168(k) before their tax return would become due, the IRS issued Rev. Proc. 2019-33 to provide further relief.

Rev. Proc. 2019-33

Rev. Proc. 2019-33 allows a taxpayer to make a late election or to revoke an election under Section 168(k) for bonus depreciation solely for assets acquired and placed in service by a taxpayer after September 28, 2017 for the 2017 tax year. With this late election relief, the taxpayer will effectively be able to choose whether to take (i) 100% bonus depreciation, (ii) 50% bonus depreciation or (iii) no bonus depreciation with respect to eligible property (normal depreciation rules still apply to the portion of property not immediately deducted). Note that any retroactive election or revocation under Rev. Proc. 2019-33 will not apply to taxpayer property eligible for bonus depreciation under 168(k) that was acquired and placed in service on or before September 28, 2017 (so, there will potentially be disparate treatment of certain assets for the 2017 tax year).

How to Make a Retroactive Election or Revocation?

Taxpayers may make a retroactive election or change a previous election by either:

  1. Filing an amended return (only if the tax return for the succeeding tax year has not yet been filed);
  2. Partnership taxpayers may file an Administrative Adjustment Request (AAR) (only if the tax return for the succeeding tax year has not yet been filed); or
  3. File a Form 3115, Application for Change in Accounting Method, during the first, second or third taxable year following the 2017 tax year (i.e., within the statute of limitations).

The third option of filing a Form 3115 Change in Accounting Method is the least burdensome for taxpayers.

Is this Relevant for Me?

The determination of whether or not to retroactively elect or revoke a bonus depreciation election is made on a facts and circumstances basis by looking at the taxpayer’s taxable income for the 2017 tax year and its go-forward taxable income projections. The interplay with other Code Sections, such as use of net operating losses under Section 172, should also be considered. However, this determination will be especially relevant for taxpayers that (i) generated a loss during the relevant tax year or (ii) had taxable income but did not use 100% of the bonus depreciation it was otherwise entitled to for the relevant tax year.

Please contact one of the authors if you would like to discuss whether making an election or revocation under Rev. Proc. 2019-33 is the proper course for you.