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Business Tax

IRS issues guidance on making and revoking bonus depreciation elections

Thomson Reuters Tax & Accounting  

Thomson Reuters Tax & Accounting  

Rev Proc 2019-33, 2019-34 IRBIR 2019-135

The IRS has issued guidance allowing a taxpayer to make or revoke certain bonus depreciation elections that were potentially affected by the Tax Cuts and Jobs Act changes to the bonus depreciation rules. The guidance applies to certain property acquired by the taxpayer after September 27, 2017, and placed in service by the taxpayer during its tax year that includes September 28, 2017.

Background. Prior to amendment by the Tax Cuts and Jobs Act (TCJA) (PL 115-97), Code Sec. 168(k)(1) allowed a 50% additional first year depreciation deduction for qualified property for the tax year in which the qualified property was placed in service by the taxpayer. After the TCJA, the additional first year depreciation deduction percentage was increased from 50% to 100%.

Qualified property is defined, in part, as property the original use of which begins with the taxpayer. (Code Sec. 168(k)(2)(A)(ii))

Code Sec. 168(k)(5) allows a taxpayer to elect to deduct additional first year depreciation for certain plants.

Code Sec. 168(k)(7) allows a taxpayer to elect not to deduct additional first year depreciation for any class of qualified property placed in service by the taxpayer during the tax year.

Code Sec. 168(k)(10), added by the TCJA, allows a taxpayer to elect to deduct 50%, instead of 100%, additional first year depreciation for certain qualified property.

Code Sec. 446(e) requires a taxpayer to secure the consent of the IRS before changing a method of accounting for federal income tax purposes. Reg. §1.446-1(e)(3)(ii) authorizes the IRS to prescribe administrative procedures setting forth the limitations, terms, and conditions necessary to permit a taxpayer to obtain consent to change a method of accounting.

IRS guidance—Sec. 168(k)(5) deemed election. The revenue procedure provides that if a taxpayer did not make a Code Sec. 168(k)(5) election but timely filed its federal tax return for the 2016 tax year or the 2017 tax year, then the taxpayer will be treated as making the Code Sec. 168(k)(5) election for a specified plant planted or grafted by the taxpayer after September 27, 2017, and during its 2016 tax year or 2017 tax year, assuming the taxpayer:

  1. On that return, claimed the 100% additional first year depreciation for that specified plant or, if the taxpayer made the Code Sec. 168(k)(10) election as provided in this revenue procedure (see below), claimed the 50% additional first year depreciation deduction for that specified plant; and
  2. Did not revoke the Code Sec. 168(k)(5) election for that specified plant under this revenue procedure (see below). (Rev Proc 2019-33, Section 4.01(2))

For purposes of this revenue procedure, the 2016 tax year is a taxpayer’s tax year beginning in 2016 and ending on or after September 28, 2017. The 2017 tax year is a taxpayer’s tax year beginning in 2017 and ending on or after September 28, 2017. (Rev Proc 2019-33, Section 3)

Making a late Sec. 168(k)(5) election. If a taxpayer timely filed its federal tax return for the 2016 tax year or 2017 tax year; did not deduct on that return the 100% additional first year depreciation, or the 50% additional first year depreciation if the taxpayer made the Code Sec. 168(k)(10) election, for a specified plant that was planted or grafted by the taxpayer after September 27, 2017; and during its 2016 tax year or 2017 tax year did not make the Code Sec. 168(k)(5) election, then the taxpayer may still make the Code Sec. 168(k)(5) election for that specified plant. The revenue procedure provides details as to how to make this late election. (Rev Proc 2019-33, Section 4.02)

Consent granted to revoke the Sec. 168(k)(5) election. If, on its timely filed federal tax return for the 2016 tax year or the 2017 tax year, a taxpayer made the Code Sec. 168(k)(5) election, then the IRS grants the taxpayer consent to revoke that election, provided the taxpayer makes the revocation within the time and in the manner described in the revenue procedure. (Rev Proc 2019-33, Section 4.03)

Sec. 168(k)(7) election in general. A taxpayer may make the Code Sec. 168(k)(7) election not to deduct additional first year depreciation for all qualified property that is in the same class of property and placed in service by the taxpayer in the same tax year. The revenue procedure provides details of what a class of property is. (Rev Proc 2019-33, Section 5.01)

Deemed Sec. 168(k)(7) election. The revenue procedure provides that if a taxpayer did not made a Code Sec. 168(k)(7) election but timely filed its federal tax return for the 2016 tax year or the 2017 tax year, then the taxpayer will be treated as making the Code Sec. 168(k)(7) election for a class of property that is qualified property acquired after September 27, 2017, by the taxpayer and placed in service by the taxpayer during its 2016 tax year or 2017 tax year, assuming the taxpayer:

  1. On that return, did not claim the 100% additional first year depreciation for that class of property;
  2. Did not revoke the Code Sec. 168(k)(7) election for that class of property (see below); and
  3. Did not make a Code Sec. 168(k)(10) election for the 2016 tax year or the 2017 tax year. (Rev Proc 2019-33, Section 5.02(2))

Making a late Sec. 168(k)(7) election. If a taxpayer timely filed its federal tax return for the 2016 tax year or the 2017 tax year and claimed on that return the 100% additional first year additional depreciation for a class of property that is qualified property acquired after September 27, 2017, by the taxpayer and placed in service by the taxpayer during its 2016 tax year or 2017 tax year, then the taxpayer may still make the Code Sec. 168(k)(7) election for such class of property. The revenue procedure provides details as to how to make this late election. (Rev Proc 2019-33, Section 5.03)

Consent granted to revoke the Sec. 168(k)(7) election. If, on its timely filed federal tax return for the 2016 tax year or the 2017 tax year, a taxpayer made the Code Sec. 168(k)(7) election, the IRS grants the taxpayer consent to revoke the election, provided the taxpayer makes the revocation within the time and in the manner described in the revenue procedure. (Rev Proc 2019-33, Section 5.04)

Sec. 168(k)(10) election in general. A taxpayer may elect under Code Sec. 168(k)(10) to deduct 50%, instead of 100%, additional first year depreciation for all qualified property acquired after September 27, 2017, by the taxpayer and placed in service by the taxpayer during its 2016 tax year or 2017 tax year. If a taxpayer makes an election to apply Code Sec. 168(k)(5) for its 2016 tax year or 2017 tax year, the taxpayer also may make a Code Sec. 168(k)(10)election to deduct 50%, instead of 100%, additional first year depreciation for all specified plants that are planted or grafted after September 27, 2017, by the taxpayer for which the taxpayer has made a Code Sec. 168(k)(5) in accordance with the revenue procedure. (Rev Proc 2019-33, Section 6.01)

Time and manner for making Sec. 168(k)(10) election. The Code Sec. 168(k)(10) election must be made by the due date, including extensions, of the federal tax return for the taxpayer’s tax year that includes September 28, 2017. (Rev Proc 2019-33, Section 6.02)

Deemed Sec. 168(k)(10) election. The revenue procedure provides that if a taxpayer did not made a Code Sec. 168(k)(10) election but timely filed its federal tax return for the 2016 tax year or the 2017 tax year, then the taxpayer will be treated as making the Code Sec. 168(k)(10) election for all qualified property acquired after September 27, 2017, by the taxpayer and placed in service by the taxpayer during its 2016 tax year or 2017 tax year, or all specified plants that are planted or grafted after September 27, 2017, by the taxpayer for which the taxpayer has made a Code Sec. 168(k)(5) election in accordance with the revenue procedure, assuming the taxpayer:

  1. On that return, claimed the 50% additional first year deprecation for all such qualified property or all such specified plants, as applicable; and
  2. Did not revoke the Code Sec. 168(k)(10) election in accordance with the revenue procedure. (Rev Proc 2019-33, Section 6.03(2))

Making a late Sec. 168(k)(10) election. If a taxpayer timely filed its federal tax return for the 2016 tax year or the 2017 tax year, and either (1) claimed on that return the 100% additional first year additional depreciation for (a) all qualified property acquired after September 27, 2017, by the taxpayer and placed in service by the taxpayer during its 2016 tax year or 2017 tax year, or (b) all specified plants that are planted or grafted after September 27, 2017, by the taxpayer for which the taxpayer has made a Code Sec. 168(k)(5) election in accordance with the revenue procedure, or (2) did not claim on that return any additional first year depreciation deduction for all such qualified property or all such specified plants and revoked the Code Sec. 168(k)(7) election made on that return in accordance with the revenue procedure, then the taxpayer may still make the Code Sec. 168(k)(10) election for all such qualified property or all such specified plants. The revenue procedure provides details as to how to make this late election. (Rev Proc 2019-33, Section 6.04)

Consent granted to revoke the Sec. 168(k)(10) election. If, on its timely filed federal tax return for the 2016 tax year or the 2017 tax year, a taxpayer made the Code Sec. 168(k)(10)election in accordance with the revenue procedure, the IRS grants the taxpayer consent to revoke the election, provided the taxpayer makes the revocation within the time and in the manner described in the revenue procedure. (Rev Proc 2019-33, Section 6.05)

Effective date. This revenue procedure is effective July 31, 2019, with regards to a taxpayer that:

  1. Acquired qualified property after September 27, 2017, and placed in service such property during the 2016 tax year;
  2. Acquired qualified property after September 27, 2017, and placed in service such property during the 2017 tax year; or
  3. Planted or grafted a specified plant after September 27, 2017, and during the taxpayer’s 2016 tax year or 2017 tax year. (Rev Proc 2019-33, Section 3 and Section 9)

References: For Code Sec. 168(k)(5) deprecation issues, see FTC 2d/FIN ¶L-9311.1A. For Code Sec. 168(k)(7) depreciation issues, see FTC 2d/FIN ¶L-9311E. For Code Sec. 168(k)(10) depreciation issues, see FTC 2d/FIN ¶L-9311E. For accelerated depreciation, in general, see United States Tax Reporter ¶1684 et seq.

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