New IRS Guidance Addresses Bonus Depreciation and Related Issues for Qualified Improvement Property

April 21, 2020

On April 17, the IRS released Revenue Procedure 2020-25 in response to the retroactive assignment of a 15-year recovery period for qualified improvement property (QIP) and the bonus depreciation “glitch-fix.” The term “qualified improvement property” means any improvement made by a taxpayer to an interior portion of a building that is nonresidential real property if such improvement is placed in service after the date such building was first placed in service by any person. However, QIP does not include any improvement for which the expenditure is attributable to the enlargement of the building; any elevator or escalator; or the internal structural framework of the building.  

Taxpayers who previously filed two or more returns using what is now considered an "incorrect" depreciation method for QIP (usually 39 years under MACRS or 40 years under ADS, as a result of certain elections) are required to file an accounting method change on Form 3115, “Application for Change in Accounting Method,” to either claim bonus depreciation and/or additional depreciation based on the 15-year (or 20-year under ADS) recovery period. Under Revenue Procedure 2020-25, taxpayers opting to make this change can apply the automatic consent procedures.  If a taxpayer has only filed one tax return (e.g., 2018), they may either file Form 3115 adopting the change for the 2018 QIP on the 2019 return or an amended 2018 return. No alternatives to Filing Form 3115 or an amended return are provided.  A new designated change number 244 should be used to describe the change.

If a taxpayer files an amended return (including an amended Form 1065, “U.S. Return of Partnership Income”) to correct the QIP depreciation period and/or claim bonus depreciation, the amended return is due on or before October 15, 2021.  As most recently pronounced in Revenue Procedure 2020-23, certain partnerships subject to the centralized audit regime (CPAR) may file an amended partnership return and provide corresponding Schedules K-1 before September 30, 2020.

The guidance also allows taxpayers to make a late election or revoke certain previously made elections whether or not directly related to QIP, such as the election to opt out of bonus depreciation, the election to use ADS depreciation and the election to claim bonus depreciation at the 50% rate in lieu of the 100% rate for all qualified property.  Taxpayers may make a late election or revoke a previously made election that was made with respect to depreciable property placed in service during a tax year ending in 2018, 2019 or 2020. The return containing a previously made election must have been timely filed before April 17, 2020.

Typically, making or revoking an election is not considered an accounting method. However, because of the administrative burden of filing amended returns and AARs, the IRS is allowing taxpayers to treat the making or revoking of these elections as a change in method of accounting with a Section 481(a) adjustment. These elections and revocations may be made on an amended return or Form 3115 and for this limited time are being considered as a change in accounting method that does not require IRS consent.  A new designated change number 245 should be used to describe the change.

Revenue Procedure 2020-25 does not apply to a QIP that was expensed under any other provision, including Code Sec. 179 as qualified real property.  Additionally, it does not apply to an electing real property trade or business or electing farming business that made a late election or withdrew an election related to the business interest deduction limitations under Section 163(j)(7) for the tax year in which QIP was placed in service. Guidance related to changes to depreciation affected by the late election or a withdrawn election are contained in Revenue Procedure 2020-22.

In addition, Revenue Procedure 2020-25 suspends certain “eligibility" rules established by Revenue Procedure 2015-13, including the prohibition against changes in an accounting method in a taxpayer's last tax year of business or making a change for the same item during any of the five tax years ending with the year of change (5-Year Rule).

For further information concerning this new development, please contact your Marks Paneth tax advisor. Contact our Response Team or visit our Pandemic Resource Center for additional updates and guidance on the coronavirus (COVID-19).

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