New guidance allows taxpayers to choose the best bonus depreciation elections
IRS guidance provides relief for taxpayers to make or change elections based on bonus depreciation regulations.
In Rev. Proc. 2020-50. the IRS provides transition relief allowing taxpayers to make or change elections based on different sets of bonus depreciation regulations issued during 2018-2020. The regulations on bonus depreciation generally apply to depreciable property acquired and placed in service after September 27, 2017. Full 100% bonus depreciation is generally available for property placed in service after that date and before January 1, 2023.
TCJA and CARES Act bonus depreciation changes
The TCJA increased the bonus depreciation rate from 50% to 100% for property acquired and placed in service after September 27, 2017 and modified the definition of qualifying property to include used property. The CARES Act later modified the definition of qualified improvement property (QIP) making it 15 instead of 39-year property and so eligible for bonus depreciation.
Following the TCJA’s passage, the IRS issued:
- 2018 proposed regulations and 2019 final regulations on the TCJA changes to bonus depreciation.
- The final regulations largely adopted the proposed regulations with some modifications, such as clarifications on depreciating self-constructed property.
- 2019 proposed regulations on additional matters not covered in the previous regulations, including elections for components acquired after September 27, 2017 for property constructed prior to September 28, determining whether a taxpayer or predecessor has a depreciable interest in used property, and rules for consolidated groups.
- 2020 final regulations that adopt the proposed regulations with further clarifications.
- The final regulations modify the definition of qualified improvement property to reflect the amendments made by the CARES Act and remove rules in the 2019 proposed regulations regarding a partner’s prior interest in partnership depreciable property.
Bonus depreciation election choices available under Rev. Proc. 2020-50
Rev. Proc. 2020-50 allows taxpayers to apply the:
- 2019 and 2020 final regulations (collectively referred to as the final regulations),
- 2019 final regulations only, or
- 2019 proposed regulations.
Taxpayers may make late elections or revoke or change previous elections depending on the taxpayer’s previous actions with respect to bonus depreciation.
A taxpayer who chooses to apply the final regulations in their entirety must apply them in subsequent years. For example, a taxpayer who makes a late election to treat qualified improvement property placed in service during 2018 as 15-year property (instead of 39-year property under the TCJA) must apply this treatment to any subsequent qualified improvement property.
In that case, the taxpayer may file an amended return (administrative adjustment request for partnerships) or file an automatic change using Form 3115, Application for Change in Accounting Method. The change is treated as a change from an impermissible to a permissible depreciation method and the taxpayer would compute a §481(a) adjustment and use designated change number (DCN) 246.
Some other possibilities include:
- Electing out of bonus depreciation
- Electing 50% bonus depreciation (generally applies only to property placed in service during 2017)
- Component elections for acquired or self-constructed property
- Elections for used property acquired from a predecessor company
- Elections for plants bearing fruits and nuts
See Rev. Proc. 2020-50 for how to make elections for these and other changes based on which regulations the taxpayer chooses to apply. Rev. Proc. 2020-50 is effective November 6, 2020, and generally applies to tax years ending on or after September 28, 2017 and the before first year that begins on or before January 1, 2021 (tax years 2017 through 2020 for calendar year taxpayers).