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IRS guidance on late elections under Section 168

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Tax Hot Topics newsletter The IRS recently released guidance (Rev. Proc. 2022-23) that allows taxpayers to make late elections for several accelerated depreciation deductions that were reinstated retroactively in 2019.

The guidance applies to certain qualified Indian reservation property: additional first-year depreciation deductions for qualified second-generation biofuel plant property, and qualified film, television, or live theatrical production expenses. The provisions had originally expired for assets placed in service or qualified productions commencing after Dec. 31, 2017. The Taxpayer Certainty and Disaster Tax Relief Act of 2019 (the 2019 Act) retroactively extended these provisions to include assets placed in service or qualified productions commencing through Dec. 31, 2020. Subsequent legislation has further extended the provisions related to qualified Indian reservation property and qualified film, television, and theatrical production costs. These three provisions and related elections have different effects and impacts to taxpayers.

Section 168(j) allows taxpayers that place in service qualified Indian reservation property to use shorter recovery periods described in Section 168(j)(2) in lieu of the standard modified accelerated cost recovery system (MACRS) depreciation recovery periods. The Section 168(j)(8) election allows taxpayers with qualified property to elect out of the shorter recovery periods and to instead apply the MACRS depreciation recovery periods.

Section 168(l) provides a 50% additional first-year depreciation deduction for second-generation biofuel plant property that is placed in service to the extent it does not otherwise qualify for bonus depreciation under Section 168(k). The Section 168(l)(3)(D) election allows a taxpayer to elect out of the additional depreciation deduction (similar to a taxpayer electing out of bonus depreciation under Section 168(k)(7)).

Lastly, Section 181(a)(1) provides an election that allows a taxpayer to treat the costs of any qualified film, television, or theatrical production as an expense that is not chargeable to a capital account, up to a $15 million dollar limitation per production. Taxpayers that do not make this election are required to capitalize and depreciate these costs.

The 2019 Act was enacted on Dec. 20, 2019, which meant that for many taxpayers, the retroactive extension of these provisions occurred after they had timely filed tax returns for tax years ending in 2018, and perhaps even 2019. As such, Rev. Proc. 2022-23 allows taxpayers to make late elections, if applicable, in one of the following ways:

  • File an amended federal income tax return
  • File an Administrative Adjustment Request (AAR) if the taxpayer is a partnership subject to the centralized partnership regime
  • File a Form 3115

Taxpayers that choose to amend or file an AAR must do so no later than the earlier of either Dec. 31, 2022, or the three-year statute of limitations date determined from the original filing date of the tax return. The amended tax return, or AAR, must include the adjustment to taxable income for the late election and any collateral adjustments to taxable income or to tax liability for the late election year. Taxpayers also must file amended tax returns, or AARs, for all succeeding years in which tax returns have already been filed that would be impacted by the late election made in the prior year. Taxpayers that choose to file a Form 3115 will need to do so with the first or second federal income tax return filed after April 19, 2022.

Rev. Proc. 2022-23 provides an opportunity for taxpayers to reassess certain property and theatrical production costs in response to amendments made under the 2019 Act. The procedures provide flexibility for taxpayers to determine how to affect these changes. Taxpayers evaluating how to approach the options for making the late elections 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 deductions, Section 163(j) interest expense limitations, and general business credits.

Rev. Proc. 2022-23 is effective April 19, 2022.

Contact:
Sharon Kay
National Managing Partner
Washington National Tax Office 
T +1 202 861 4140

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