Taxpayers urgently need procedural guidance on how to take advantage of the retroactive correction of a drafting error that left qualified improvement property ineligible for bonus depreciation, according to practitioners.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136), signed into law March 27, provided the long-awaited retroactive technical correction to include qualified improvement property (QIP) in the Tax Cuts and Jobs Act’s 100 percent bonus depreciation regime. Now taxpayers and practitioners need some help from the IRS on how to apply the retroactive change for past tax years and going forward.
Tracy Watkins of RSM US LLP told Tax Notes that while final and procedural bonus depreciation guidance had appeared to be one of the IRS’s top priorities, she hopes the agency shifts its focus to the QIP procedural guidance. “It will have the most positive impact for so many of our taxpayers that are currently struggling with COVID-19,” she said.
QIP generally involves improvements made to the interior of a building, such as when a restaurant or retailer remodels a location or when a company moves into a new headquarters and changes the layout to suit its needs. Restaurants and retailers have been particularly hard hit by the reduction in economic activity accompanying social distancing measures meant to restrain the spread of the coronavirus.
Watkins said the sooner taxpayers have QIP guidance, the sooner they can take advantage of the relief. Many taxpayers have already been tracking their QIP based on prior attempts to pass the technical correction.
Ellen McElroy of Eversheds Sutherland (US) LLP said the IRS and Treasury have probably been thinking about the general contours of post-technical-correction QIP guidance, so hopefully some guidance can be released quickly.
Modeling and Interactions
Jane Rohrs of Deloitte Tax LLP said another reason taxpayers need the QIP guidance quickly is so they can have time to model the interaction of that change with others made in the CARES Act, particularly the loosening of the TCJA’s restrictions on net operating losses and interest deductions.
In order to maximize their benefits, taxpayers are going to have to examine several alternatives, especially in the hope that they can get their deductions into a year before the TCJA lowered the corporate tax rate from 35 percent to 21 percent, Rohrs said.
McElroy noted that taxpayers will need to balance changes to the alternative minimum tax in addition to NOLs and the interest limitation. Any taxpayer’s decision on how to apply the CARES Act provisions will be heavily dependent on its specific situation, she said, adding that she expects to see every kind of circumstance.
What’s Needed
Watkins said taxpayers have to address both the retroactive application of bonus depreciation to QIP and the accompanying alternative depreciation system amendment shortening the recovery period from 40 years to 20 years. She said she hopes the IRS and Treasury will follow the same pattern for guidance they’ve used before when Congress has made retroactive changes, including allowing amended tax returns, accounting method changes, and reconsideration of elections to take or decline bonus depreciation.
Both Rohrs and Watkins noted that taxpayers who elected to retain full interest expensing under section 163(j) at the cost of their eligibility for bonus depreciation — as electing real property businesses — will probably want to reexamine those decisions.
McElroy suggested that the guidance start as a notice containing a draft revenue procedure. That would both speed up the initial guidance release and allow taxpayers and practitioners to provide additional feedback to the IRS and Treasury for further refinements, she said. Taxpayers and practitioners often only find issues with those sorts of procedures when they try to use them later on, she said.
Any accounting method change in that guidance should be automatic, McElroy added.
Michael D. Resnick, also of Eversheds Sutherland, said taxpayers will need procedural guidance for several of the other CARES Act provisions — including the NOL and interest relief provisions — at the same time as for QIP, and perhaps in the same piece of guidance. Interactions between those provisions would be one key area of feedback possible with the draft notice as a first round of guidance, he said.
Resnick said the IRS and Treasury should also consider more types of relief, such as so-called 9100 relief from missed elections and waivers of the five-year scope limitation that normally prevents successive automatic accounting method changes.
Rohrs said the extension of tax return filing due dates to July 15 may help some taxpayers who are weighing the comparative administrative costs of filing amended returns versus accounting method changes.
Many taxpayers, especially those on a calendar year for tax purposes, will be able to use existing accounting method change rules to take advantage of the QIP technical correction, including via amended tax returns, according to Rohrs. However, many fiscal-year taxpayers will still need further guidance, she said.
“The other thing is, the government might consider providing some relief around the filing requirements for just this QIP change for small taxpayers,” Rohrs said. “That might be helpful.”
Rohrs also pointed out a correction within the wording of the technical correction. The QIP definition applies to property the taxpayer makes, rather than uses, she noted. This means that a taxpayer buying a building can’t try to claim that some portion of the otherwise bonus-depreciation-ineligible purchase is instead QIP, she said.