The second set of final bonus depreciation regulations will include clarifications about the recent qualified improvement property (QIP) technical correction.
The IRS has already received questions about whether a portion of the QIP technical correction limiting that property classification to what is “made by the taxpayer” includes third-party construction, Kathleen Reed, branch 7 chief, IRS Office of Associate Chief Counsel (Income Tax and Accounting), said on an April 27 webcast sponsored by Eversheds Sutherland (US) LLP.
Reed said that question will be answered as part of the next batch of final bonus depreciation regulations under the Tax Cuts and Jobs Act. Reed said she expects those regs will be out this summer.
The procedural guidance for taxpayers looking to follow those final regulations or first set (T.D. 9874) rather than the initial proposed regs (REG-104397-18) should follow within about one month, Reed said. And that procedural guidance should have similar flexibility to Rev. Proc. 2020-25, 2020-19 IRB 1, for taxpayers implementing the QIP technical correction, she said.
Rev. Proc. 2020-25 allows taxpayers to pick between amending old tax returns and filing accounting method changes — with section 481(a) adjustments — to make most changes, including those regarding elections.
The TCJA expanded bonus depreciation and increased the immediate deduction to 100 percent. However, a drafting error in the legislation left QIP as 39-year property falling outside the expanded definition, rather than 15-year property that would qualify. The Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136) included a technical correction fixing the QIP property classification retroactively and clarifying that the improvements had to be made by the taxpayer.
QIP is generally later improvements to the interior of a building. Reed said the most interesting example she could think of was a law firm that operates on two floors of a building installing a stairway between the floors so that its employees didn’t have to use the elevator.
Reed said the added clarification wasn’t surprising and fit with her understanding of the Joint Committee on Taxation’s interpretation of Congress’s intent.
Ellen McElroy of Eversheds said taxpayers who thought that asset acquisitions could have included QIP qualifying for bonus depreciation should reexamine their valuations to account for the unavailability of that deduction.
Not So Fast
McElroy noted that some taxpayers have been asking, in the wake of Rev. Proc. 2020-25, whether they can leave their 2018 and 2019 property untouched as 39-year property.
Reed said the retroactivity of the technical correction made the 39-year class life for 2018 and 2019 QIP an improper tax accounting method as soon as the CARES Act was signed. However, there is nothing requiring a taxpayer to fix the method as soon as possible, she said.
A taxpayer can wait for its 2020 tax return, the last year for which the IRS has waived the scope limitation that normally prevents a taxpayer from making an automatic accounting method change less than five years after a prior automatic change, Reed said, adding, “If that’s not a problem with their filing an automatic [accounting method change], they can even wait beyond 2020 — they can wait until 2021 or later.”
Reed blessed another suggestion that a provision of Rev. Proc. 2015-13, 2015-5 IRB 419, could be used alongside the QIP procedural guidance released April 17, allowing a taxpayer that has already filed a 2019 tax return to amend that return with an accounting method change, rather than wait for a 2020 tax return or amend two returns. She pointed out that the option must be executed within six months of the 2019 return filing.
Procedural Illumination
Reed said that while Rev. Proc. 2020-25 addresses several elections related to QIP, it doesn’t discuss small business expensing under section 179. Some real estate companies have asked about 2018 section 179 elections that were limited by that provision’s income limitations, she said.
“Now, with the CARES Act, they would like to take advantage of the CARES Act and take all of their deduction right now rather than carry it over,” Reed said. “We have decided [that] what they can do is for 2018 file an amended return and revoke their section 179 election.” After that amendment, the taxpayer can choose from the options available under Rev. Proc. 2020-25, she said.
Reed said that Rev. Proc. 2020-25 uses tax years ending in 2018, 2019, and 2020, rather than using when the tax year started, to include taxpayers with fiscal tax years as well as those on calendar years. “We did that purposely for the fiscal-year taxpayers where the tax year began in 2017 and ends in 2018. There are many retailers that are fiscal-year taxpayers . . . with a fiscal year ending January 31,” she said, adding that the decision extends the full swath of the revenue procedure’s options to those taxpayers.
The one-year QIP provision of Rev. Proc. 2020-25 is meant to address taxpayers that may not have created an accounting method with one year’s improper treatment, Reed said. They wouldn’t be able to make an automatic method change (without having adopted an accounting method yet) otherwise, she said. The IRS didn't think that taxpayers treat year-old assets differently than older assets and was thus comfortable lumping them all together, she added.
Reed said the government was concerned about the potential for a taxpayer to have made an election (perhaps a real property business trading bonus depreciation away for unlimited interest deductions), revoking that election in response to the QIP technical correction, and then later deciding to make the election again. The reelection will have to be done as a standard letter ruling request for so-called 9100 relief, she said.