The IRS’s ambitious agenda for tax accounting and depreciation guidance might take a hit as the agency attempts to address taxpayers’ questions about coronavirus response legislation.
“Understandably, these efforts are overshadowing any endeavors to address outstanding Tax Cuts and Jobs Act guidance,” including the restriction on settlement deductions under section 162(f), the interest limitation under section 163(j), bonus depreciation under section 168(k), and tax accounting changes under section 451, according to Ellen McElroy of Eversheds Sutherland (US) LLP.
But Carol Conjura of KPMG LLP told Tax Notes that the IRS’s recent ambitious guidance plans would leave the government room to prioritize critical TCJA projects like substantive and procedural revenue recognition guidance and still get those done on time while pushing lower-priority projects back.
David Strong of Crowe LLP said he’s optimistic that the proposed and final section 163(j) regs won’t be delayed for too long by disruptions related to the coronavirus, particularly because regulatory review is underway for the proposed regs and completed for the final.
Finalization of the second batch of bonus depreciation regulations shouldn’t be delayed for too long, Strong said, adding that he believes that the accompanying procedural guidance also won’t be far behind.
Strong noted that the IRS has been actively working on the section 451 regs and that both the American Bar Association Section of Taxation and the American Institute of CPAs are working on substantial comments that they have yet to submit for those projects. “I could see that those regulations might be delayed, and significantly,” he said, pointing to the difficulties that the IRS and Treasury might face when forced to work remotely. Also, the bonus depreciation regulations are further along in the process than the section 451 regs, he said.
Guidance under the multiple coronavirus stimulus bills will probably be the highest priority, Strong said.
McElroy said the crisis is creating even more regulatory distractions than a more commonly occurring regional disaster would because of its nationwide scope. And it hit in the middle of the return filing season, she noted.
Hunkered Down and Working Away
“Without this virus, I would have expected that counsel would be continuing to work to get the guidance finished. I also would have expected that Treasury would have continued to meet with taxpayers and their reps on such TCJA issues had this pandemic not erupted,” McElroy said.
Strong said he expects opportunities for practitioners to informally comment on guidance in the works to shift to direct and conference calls. He added that fortunately, he made many of his comments on bonus depreciation and section 451 during the fall.
Conjura noted conferences like the ABA tax section meetings as vehicles for tax community comment beyond the formal submissions and hearings. She said that while the May meeting is canceled, she plans to continue the discussions with those who would have been her fellow panelists to further the exchange of ideas. “We can at least have that informal dialogue that we would have had in a meeting through a virtual meeting,” she said.
The environment of hunkering down and social distancing is much less disruptive than a government shutdown, Conjura said. “It doesn’t seem like there’s a slowdown,” with conferences about pending ruling requests and appeals conferences continuing remotely, she said.
Most normal work is continuing, Conjura added. The IRS had already started accepting filings, including Forms 3115, “Application for Change in Accounting Method,” by fax, she said.
Additional Stimulus
Several tax accounting provisions are already under consideration in the third wave of economic stimulus. They include a fix to the TCJA drafting error that excludes qualified improvement property (QIP) from bonus depreciation and tweaks to the TCJA’s interest and net operating loss limitations.
McElroy praised the inclusion of the QIP technical correction in Senate Republicans’ proposal for the third coronavirus bill. “It would be stimulating to some of the hardest-hit industries — for example, retail and restaurants,” she said.
Strong pointed to property developers and automobile retailers as additional groups that would see stimulative benefits from a QIP fix.
Conjura said fixing QIP would be nice, but that a broader and more elegant solution could be to allow bonus depreciation on all property, including otherwise-excluded real property, for some time.
Another TCJA tweak that could help stimulate companies’ cash flow would be to temporarily suspend the new section 451(b) revenue recognition rule, according to Conjura.
That rule adds financial statement inclusion as an income recognition trigger. Congress could consider relieving companies from that income acceleration when they haven’t received cash from a transaction yet, Conjura said.
McElroy said decisions in the final section 451 regulations could also have stimulative effects. “The administration is focused on maintaining liquidity; preserving tax law on realization would likely support liquidity by not accelerating income before taxpayers have a right to cash,” she said. “Additionally, if the final regulations expand the availability of the specified goods exception, it could also have a stimulus effect.”
Another possible stimulus could be to temporarily relieve taxpayers with inventory, especially those whose inventory isn’t turning over as quickly as usual because of the drop in demand, from the requirement to capture depreciation — particularly the current 100 percent bonus depreciation — in the inventory capitalization rule of section 263A, Conjura said. If half of a taxpayer’s inventory doesn’t get sold in a year, the rule could cut that taxpayer’s bonus depreciation deduction in half, she said.