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IRS Addresses Bonus Depreciation, Related Issues for Post-2017 Qualified Improvement Property

As a result of the retroactive assignment of a 15-year recovery period to qualified improvement property (QIP) placed in service after 2017, QIP generally qualifies for bonus depreciation, and typically at a 100% rate. IRS guidance requires taxpayers who previously filed two or more returns using what is now an “incorrect” depreciation period (usually 39 years) to file an accounting method change on Form 3115, Application for Change in Accounting Method, to claim bonus depreciation and/or depreciation based on the 15-year recovery period. The automatic consent procedures apply. If only one return has been filed, a taxpayer must either file Form 3115 or an amended return. No alternatives to filing Form 3115 or an amended return are provided.

The guidance also allows taxpayers to make or revoke various elections whether or not directly related to QIP, such as the election out of bonus depreciation. These elections and revocations may be made on an amended return or Form 3115.

The guidance applies to tax years ending in 2018, 2019, or 2020.

Amended Return Due Date

When an amended return (including an amended Form 1065, U.S. Return of Partnership Income) is filed for the placed-in-service year to correct the QIP depreciation period and/or claim bonus depreciation, the amended return is due on or before October 15, 2021, but not later than the applicable assessment limitations period. The applicable assessment limitations period is three-year starting from the later of the date the original tax return was filed, or the date the original tax return was due. Certain partnerships subject to the centralized audit regime may file an administrative adjustment request (AAR) by October 15, 2021.

Late Elections and Revocations

For a limited time, taxpayers may make a late election or revoke a prior election that was made for depreciable property placed in service during tax years ending in 2018, 2019, or 2020. The return must have been timely filed and filed before April 17, 2020. These elections and revocations are not limited to QIP. The covered elections are:

  • election to use the MACRS alternative depreciation system (ADS);
  • election to claim bonus depreciation on specified plants in the year of planting or grafting;
  • election out of bonus depreciation for a class of property; and
  • election to claim bonus depreciation at the 50% rate in lieu of the 100% rate for all bonus depreciation property placed in service in a tax year that includes September 28, 2017.

Generally, making or revoking an election is not considered an accounting method change. However, because of the administrative burden of filing amended returns and AARs, the IRS allows taxpayers to treat the making or revoking of these election as a change in method of accounting with an adjustment under Internal Revenue Code (IRC) Section 481(a).

Taxpayers may make or revoke these elections by filing an amended return (including any subsequent affected return) or AAR for the placed-in-service year of the property by October 15, 2021. However, if earlier, the amended return must be filed no later than the expiration of the limitations period for the tax year of the amended return.

For taxpayers choosing not to file an amended return, a Form 3115 to make or revoke these elections must be filed with a timely filed original income tax return (or Form 1065) for the first or second tax year after the tax year in which the property was placed in service, or with a timely filed original income return (or Form 1065) filed on or after April 17, 2020, and on or before October 15, 2021.

For more information about this article, please contact our tax professionals at taxalerts@windes.com or toll free at 844.4WINDES (844.494.6337).

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