IRS Allows Late Bonus Depreciation Elections for Tax Years Including September 28, 2017

The IRS is letting taxpayers make a late election out of 100% bonus depreciation, or revoke a previous election out, for tax years that include September 28, 2017.  The Tax Cuts and Jobs Act (TCJA) increased the 50% bonus depreciation rate to 100% for property acquired and placed in service after September 27, 2017. The IRS is providing these new election procedures in Rev. Proc. 2019-33 because proposed regulations explaining the ins and outs of TCJA’s 100% bonus depreciation rate weren’t issued until after many taxpayers filed their returns.

Normally a taxpayer that wants to make a late election out of bonus depreciation or revoke a previous election out must file a costly letter ruling request for IRS permission based on reasonable cause.

Of course, taxpayers must analyze their particular situations to determine whether it makes sense to take advantage of the IRS relief.

Late Election Out Limited to 100% Bonus Property

The late election out of 100% bonus depreciation only applies to property within a property class acquired and placed in service after September 27, 2017, in the tax year that includes September 28, 2017. This property is eligible for the 100% bonus rate. A 50% rate applies to property placed in service before September 28, 2017.

Example: A calendar year taxpayer placed in service a machine, 5-year property, on January 15, 2017 and acquired and placed in service another machine, also 5-year property, on October 15, 2017. The taxpayer claimed bonus depreciation on both machines. No other property in the 5-year property class was placed in service in 2017. If the taxpayer makes a late election out of bonus depreciation, it will apply only to the 100% bonus machine placed in service on October 15, 2017, even though both machines are 5-year property.

What About Code Sec. 168(k)(7)?

A good argument can be made that limiting the late election to property within a property class that is placed in service after September 27, 2017, does not strictly comport with Code Sec. 168(k)(7) . That section, which provides the election out, states:

 If a taxpayer makes an election under this paragraph with respect to any class of property for any taxable year, [bonus depreciation] shall not apply to any qualified property in such class placed in service during such taxable year. 

A strict reading says that an election out applies to an entire class of property placed in service during the tax year. However, the IRS apparently believes that in special circumstances it can allow taxpayers to elect out of bonus depreciation for only a portion of a property class if the bonus rates for property within that class differ based on the placed in service date.

Deemed Election Out of Bonus Depreciation

The IRS relief also includes a deemed election out of bonus depreciation for property acquired and placed in service after September 27, 2017, in a tax year that includes September 28, 2017.

A taxpayer normally must submit a statement with its return indicating that it is electing out of bonus depreciation, and specify the class or classes of property that the election applies to. The deemed election out dispenses with this requirement.

Specifically, a taxpayer is deemed to have  elected out of bonus depreciation with respect to property acquired and placed in service after September 27, 2017, within a property class if the taxpayer did not claim bonus depreciation on any of the property within the class that was placed in service after September 27, 2017.

Example:  Assume the taxpayer in the preceding example did not claim bonus depreciation on either machine, or only claimed bonus depreciation on the machine placed in service on January 15, 2017. No election out statement was filed. The taxpayer is now deemed to have elected out of 100% bonus depreciation for the machine placed in service on October 15, 2017.

Revocation of Election Out of Bonus Depreciation

Taxpayers could make a valid election out of bonus depreciation by filing an election statement for an entire class of property that includes property acquired and placed in service after September 27, 2017, in a tax year that includes September 28, 2017. These taxpayers may now revoke the election without IRS consent.

It appears that the revocation applies to all property within the property class. Rev. Proc. 2019-33 does not specifically limit the revocation to property within a property class that was placed in service after September 27, 2017. The IRS may need to clarify this issue.

Taxpayers may use these same procedures to revoke the deemed election out that is discussed above.

How to Claim Relief

To makes the late election out or revoke an election out of bonus depreciation, the taxpayer must file:

  • an amended return for the tax year that includes September 27, 2017, or
  • an accounting method change within the first three tax years that follow the tax year that includes September 27, 2017.

The amended return option expires once the taxpayer has filed a return for the tax year that follows the tax year that includes September 28, 2017.

This means, for example, that a calendar year individual, single member LLC, or C corporation with an October 15, 2019 filing extension for the 2018 tax year must file an amended 2017 return before filing its 2018 return by the October 15, 2019 extended deadline. The extended due date for partnerships, S corporations, and multi-member LLCs is September 15, 2019.

Due to the tight deadline for filing an amended return, most taxpayers interested in this relief will file an accounting method change on Form 3115. The change is filed under the automatic consent procedures and requires a Code Sec. 481(a) adjustment.

For additional information on the election out of bonus depreciation see the CCH Answer Connect Topic Page entitled Bonus Depreciation or First-Year Additional Depreciation Allowance.

By Ray G. Suelzer, J.D., LL.M.

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