Taxpayers generally cannot make late MACRS depreciation elections and revocations without IRS consent. The IRS grants permission only in extraordinary circumstances after the taxpayer files a letter ruling request.
However, recent IRS guidance in Rev. Proc. 2020-25 and Rev. Proc. 2020-50 relaxes this policy and allows taxpayers to file an amended return or an accounting method change to make the following late MACRS elections or a revocation of one of these elections:
- the election out of bonus depreciation (Code Sec. 168(k)(7));
- the election to accelerate bonus depreciation to the year of planting or grafting in lieu of the year a plant becomes productive (Code Sec. 168(k)(5);
- the election to claim bonus depreciation at the 50% rate in place of the 100% rate in a tax year that includes September 28, 2017 (Code Sec. 168(k)(10));
- the election to use the straight-line alternative depreciation system (ADS) in place of a more accelerated recovery method (Code Sec. 168(g)(7)) (Rev. Proc. 2020-25 only); and
- the election to claim 100% bonus depreciation on components of a larger property for which construction began before September 28, 2017 (Reg. §1.168(k)-2(c)) (Rev. Proc. 2020-50 only).
Years Late MACRS Election or Revocation Allowed
Under Rev. Proc. 2020-25, a late election or revocation (other than the election to use the 50% rate instead of the 100% rate) is limited to property that is:
- acquired after September 27, 2017, and
- placed in service (or planted or grafted) in a tax year ending in 2018, 2019, or 2020.
The taxpayer must have timely filed the income tax return or Form 1065 for the election or revocation year before April 17, 2020 ─ the date that Rev. Proc. 2020-25 was published. For example, a calendar-year taxpayer that filed an income tax return or Form 1065 for the 2019 tax year after April 17, 2020 may not make or revoke an election for property placed in service in 2019 under this procedure. However, the taxpayer could make or revoke elections for the 2018 tax year.
On the other hand, a late election or revocation under Rev. Proc. 2020-50 is allowed for property acquired after September 27, 2017 in a tax year beginning in 2016 through 2020, but only if a timely filed original income tax return or Form 1065 for the placed-in-service year (or year of planting or grafting) was filed before November 17, 2020 ─ the publication date of Rev. Proc. 2020-50.
Rev. Proc. 2020-50 Requires Use of Final Regulations
Rev. Proc. 2020-50 generally requires a taxpayer to retroactively apply final bonus depreciation regulations (Reg. §168(k)-(2)) in their entirely to the tax year that is subject to the late election or the revocation, as well as all subsequent tax years. Without a late election or revocation, the final bonus depreciation regulations are mandatory only for property placed in service in tax years beginning after 2020. Rev. Proc. 2020-50 includes separate guidance on changing accounting methods to comply with the final regulations.
In contrast, taxpayers making a late election or revocation under Rev. Proc. 2020-25 are not subject to this or any other similar restriction.
How to Make the Late Election or Revocation
A taxpayer may make a late election or revocation under either procedure by filing an amended return or a change of accounting method using Form 3115.
Amended Return Option
To make a Rev. Proc. 2020-25 late election or revocation on an amended return, a taxpayer must file the return or Form 1065 for the placed-in-service year (or year of planting or grafting) by October 15, 2021. The due date is December 31, 2021 under Rev. Proc. 2020-50.
However, in either case, the amended return cannot be filed later than the limitations period for assessment of tax for the tax year that the amended return is filed for. In addition, collateral adjustments are required for any subsequently filed return. Thus, a taxpayer may need to file two amended returns if a return has already been filed for the tax year that follows the tax year for which the late election or revocation is made.
The election to revoke an ADS election under Rev. Proc. 2020-25 may be made only by filing an amended return.
Form 3115 Option
Alternatively, a taxpayer may make a late election or revocation by filing an accounting method change on a Form 3115 and taking a section 481(a) adjustment into account. The Form 3115 generally must be filed with a taxpayer’s timely filed original income tax return or Form 1065 for the taxpayer’s first or second tax year following the tax year in which the property related to the election was placed in service. If later, however, the Form 3115 may also be filed with a timely filed original income tax return or Form 1065 that is filed:
- on or after April 17, 2020, and on or before October 15, 2020 (Rev. Proc. 2020-25) or
- on or after November 6, 2020 and on or before December 31, 2021 (Rev. Proc. 2020-50).
For many taxpayers, the decision to make a late election or revocation will revolve around the retroactive enactment of a five-year carryback period by the Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020 ( P.L. 116-136) (March 27, 2020).
Until the CARES Act was enacted, no carryback period applied to NOLs arising in tax years beginning in 2018, 2019, and 2020, so taxpayers evaluated their MACRS elections accordingly. With the retroactive enactment of the five-year carryback, however, many taxpayers who made elections that effectively deferred depreciation deductions to future years (e.g., the election out of bonus depreciation and the ADS straight-line election) lost out on valuable NOL carryback losses that would have been generated by maximizing depreciation deductions. In light of this inequity, the IRS is giving taxpayers a second bite at the apple.
By Ray G. Suelzer, J.D., LL.M.