The IRS recently issued Rev. Proc. 2020-50 to allow taxpayers to implement certain rule changes under the bonus depreciation regulations and make or revoke certain bonus depreciation elections following the release of the 2020 final regulations, the 2019 final regulations and the 2019 proposed regulations.
Rev. Proc. 2020-50 allows taxpayers to take advantage of favorable changes in the regulations, as long as those regulations are applied consistently in their entirety to all assets placed in service within the tax year. Taxpayers are allowed a choice to either amend tax returns or file a Form 3115 to make the changes. This guidance is welcome for taxpayers that wish to retroactively apply the regulations to tax years for which the returns have already been filed.
The guidance also includes procedures for making either a late election or revoking certain bonus depreciation elections previously made for a taxpayer’s taxable year beginning in 2016, 2017, 2018, 2019 or 2020, and it expands upon changes allowed under Rev. Proc. 2020-25 (see our prior coverage for more details). This provides a great opportunity for taxpayers that wish to reassess their filing positions in light of the final bonus depreciation regulations and COVID-19.
The guidance is generally favorable and may offer taxpayers opportunities to generate deductions that could lead to a refund on the affected return or create net operating losses that may be carried back for refunds. However, the taxpayers should consider both the time it may take to implement these changes and the impact they may have on other aspects of their tax return filings.
Background
The Tax Cuts and Jobs Act (TCJA) made substantial amendments to Section 168(k), such as expanding bonus depreciation to certain used property and Section 743(b) adjustments. As a result, the IRS issued proposed regulations in 2018, final regulations in 2019, additional proposed regulations in 2019, and final regulations in 2020. Each set of regulations allowed taxpayers the option to apply them retroactively as long as they are applied consistently in their entirety to all assets placed in service within the tax year. See our prior coverage of the 2020 regulations for more details.
Rev. Proc. 2020-25 provided taxpayers the ability to make or revoke certain bonus depreciation elections under Section 168(k), but did not comprehensively address all available elections. The new procedures in Rev. Proc. 2020-50 more fully address elections for taxpayers that have implemented or are concurrently implementing the 2019 and 2020 final regulations (“Final Regulations”), both the 2019 final and proposed regulations (“both 2019 regulations”) or the 2019 final regulations.
Changes to apply bonus depreciation regulations
As described above, taxpayers have choices when implementing the various bonus depreciation regulations and are able to retroactively apply regulations in their entirety to eligible assets placed in service in years prior to the effective date of the relevant regulations. However, it is important to note that once a taxpayer chooses to apply the 2020 final regulations to eligible assets placed in service in a particular year, the taxpayer must apply those rules consistently, in its entirety, to all subsequent tax years.
Taxpayers can change to apply the Final Regulations, both 2019 regulations or just the 2019 final regulations by either:
- Filing an amended federal income tax return, amended Form 1065 or administrative adjustment request (AAR) under Section 6227 by Dec. 31, 2021 (but not after the applicable period of limitations on assessment)
- Attaching a Form 3115 to an originally filed return for the first or second taxable year succeeding the taxable year in which the affected assets were placed in service (or, if later, on a tax return that is timely filed between Nov. 6, 2020, and Dec. 31, 2021)
Should a taxpayer choose to amend its return or file an AAR to implement the rules, collateral adjustments, such as a Section 163(j) limitation, should be made for any affected taxable years after the amended return or AAR.
Grant Thornton Insight:
For example, a taxpayer that previously filed its 2018 tax return and followed the 2018 proposed regulations may find that the 2020 final regulations would provide a more favorable depreciation result. The taxpayer would want to retroactively implement the 2020 final regulations on that 2018 tax return (and to all subsequent tax years).
When a taxpayer changes its method of accounting under Rev. Proc. 2020-50 for the first time, it is considered to be an impermissible to permissible method change, for which a Section 481(a) adjustment is allowed. If a taxpayer has floor plan financing indebtedness and is making this change, the Section 481(a) adjustment must account for the proper amount of interest expense, taking into account the interest limitation under Section 163(j). However, if a taxpayer has previously changed its method of accounting under Rev. Proc. 2020-50 and wishes to make another change in method of accounting for the same assets, the change is a permissible to permissible method change, which is implemented on a cut-off basis and can only be made on a Form 3115.
The following are some examples of significant changes between proposed and final regulations that the taxpayers would want to consider when analyzing whether to make a change to retroactively implement the regulations:
- Acquisition date of property that is manufactured, constructed, or produced for the taxpayer by another person: Under the 2018 proposed regulations, such property followed the default written binding contract rule in determining the acquisition date; under the Final Regulations, such property is treated as self-constructed property and may follow the 10% safe harbor in determining the acquisition date.
- Partnership look-through rule: Under the 2019 proposed regulations, a partner would have been considered to have a depreciable interest in partnership property based on the partner’s total allocated share of depreciation deductions for that property; this rule is removed in the 2020 final regulations and is withdrawn from the 2019 proposed regulations.
- Consolidated group rule: The 2019 proposed regulations put forth a construct for allowing bonus depreciation on certain consolidated group transactions that include a member that deconsolidates. The 2020 final regulations replaced that with an entirely new construct, including an election to not apply the special rule.
Grant Thornton Insight:
Rev. Proc. 2020-50 provides a great opportunity for tax savings by allowing taxpayers to choose to apply to eligible assets placed in service in earlier years the Final Regulations, which may have rules that are more favorable than originally proposed. For example, a taxpayer that entered into a written binding contract with another person for the construction of property prior to Sept. 28, 2017, and followed the 2018 proposed regulations would have treated the property as acquired prior to Sept. 28, 2017. When such property was placed in service, it would have been ineligible for 100% bonus depreciation. However, the taxpayer had only incurred 5% of the construction costs prior to Sept. 28, 2017. By making a change to the Final Regulations, the taxpayer’s acquisition date, as a result of the self-constructed property rules, is now after Sept. 27, 2017, and the property is eligible for 100% bonus depreciation when it is placed in service.
Bonus depreciation elections
Section 168(k) provides a number of bonus depreciation elections for taxpayers, and the Final Regulations and the 2019 proposed regulations provided additional elections. Generally, these elections had to be made on timely filed federal income tax returns (including extensions) and are irrevocable once made. Due to the timing of the regulations being issued, certain elections such as the component election may not have been available when the return was originally filed, and taxpayers needed additional guidance to allow the election to be made retroactively. These procedures have expanded upon the prior procedures for making or revoking bonus depreciation elections, especially by allowing taxpayers to make the elections provided in the 2019 proposed and 2020 final regulations.
These procedures apply to tax years beginning in 2016 through 2020 for which taxpayers have already filed the respective federal income tax return(s) prior to Nov. 17, 2020. The affected elections include:
- Section 168(k)(5), which provides an election to deduct the cost of a specified plant in the year in which the it is planted or grafted
- Section 168(k)(7), which provides an election out of bonus depreciation for qualified property placed in service during the taxable year on a class-by-class basis
- Section 168(k)(10), which provides an election to deduct 50%, instead of 100%, bonus depreciation for all qualified property acquired after Sept. 27, 2017, and placed in service in the year that includes Sept. 28, 2017
- Treas. Reg. Sec. 1.168(k)-2(c)(1), which provides the component election under the 2020 final regulations or the proposed component election under the 2019 proposed regulations
- Treas. Reg. Sec. 1.1502-68(a)(2)(xii), which provides the designated transaction election to not apply the consolidated asset acquisition rule or the consolidated deemed acquisition rule to all eligible property acquired in an otherwise qualified transaction
A taxpayer that wishes to make a late election or revoke an election, as applicable, may either:
- File an amended federal income tax return, amended Form 1065 or AAR by Dec. 31, 2021 (but not after the applicable period of limitations on assessment)
- Attach a Form 3115 to an originally filed return for the first or second taxable year succeeding the taxable year in which the affected assets were placed in service (or, if later, on a tax return that is timely filed between Nov. 6, 2020, and Dec. 31, 2021)
The procedures require that if a taxpayer is filing a Form 3115 to make or revoke an election and is concurrently filing a method change to implement the regulations as described above or to correct its method of accounting for its qualified improvement property or other property, must file all changes on one Form 3115, and must also provide a single net Section 481(a) adjustment for all the concurrent changes for assets placed in service during the same taxable year.
Grant Thornton Insight:
Rev. Proc. 2020-50 creates an opportunity for taxpayers to review the elections made, deemed to be made, or not made, and to consider making tax beneficial changes. The guidance expands on the opportunities created in prior guidance by including more tax years and additional elections.
Next steps
The guidance provides a wonderful opportunity for taxpayers to reassess their depreciation circumstances in response to changes made under the Final Regulations. Taxpayers may generate deductions that could lead to a refund on the affected return, or create net operating losses that may be carried back for refunds. The procedures provide flexibility in determining how to make these changes. However, the taxpayers should consider both the time it may take to implement these changes and the impact they may have on other aspects of their tax return filings, such as charitable contribution limitations, foreign-derived intangibles income (FDII) deductions, Section 163(j) interest expense limitations, Section 481(a) adjustments and general business credits.
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