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The IRS has issued procedural guidance (Revenue Procedure 2020-50) for taxpayers to implement the 2020 final bonus depreciation regulations (2020 final regulations), the 2019 final bonus depreciation regulations (2019 final regulations), or both the 2019 final and proposed bonus depreciation regulations (2019 final and proposed regulations), for property acquired and placed in service by the taxpayer after September 27, 2017. Revenue Procedure 2020-50 also contains guidance for making certain late elections or revoking certain elections made under IRC Section 168(k), as described later. Revenue Procedure 2020-50 modifies Revenue Procedures 2019-43 and 2020-25, and is effective November 6, 2020. For more information on the 2020 final regulations, see Tax Alert 2020-2330.

Procedures for implementing bonus depreciation regulations

Initial accounting method change to implement the bonus depreciation regulations

Under Revenue Procedure 2020-50, the first time a taxpayer changes its accounting method for depreciable property or specified plants to comply with the 2020 final regulations, 2019 final regulations or both the 2019 final and proposed regulations, the change will be treated as a change from an impermissible accounting method to a permissible accounting method.

Revenue Procedure 2020-50 allows taxpayers to change from an impermissible method to a permissible method for depreciation associated with the adoption of the 2020 final regulations, 2019 final regulations or both the 2019 final and proposed regulations by filing Form 3115 with the taxpayer's timely filed original federal income tax return or Form 1065 under the automatic change procedures of Revenue Procedure 2015-13. Revenue Procedure 2020-50 requires taxpayers to make this change with an IRC Section 481(a) adjustment.¹ This change is generally automatic (DCN 246).

As an alternative, taxpayers may also change from an impermissible method for depreciation to a permissible depreciation method associated with the adoption of the 2020 final regulations, 2019 final regulations or both the 2019 final and proposed regulations; to do so, they must file an amended federal income tax return or amended Form 1065 for the placed-in-service year of the depreciable property and for the planting year of the specified plant on or before December 31, 2021. The amended return, however, cannot be filed later than the applicable period of limitations on assessment for the tax year for which the taxpayer is filing the amended return. The same rules apply to partnerships subject to the centralized partnership audit regime under the Bipartisan Budget Act (BBA) of 2015, except they may file an administrative adjustment request (AAR), instead of an amended return or Form 1065.

The amended return or AAR must include any adjustments to taxable income for the change in determining depreciation of the property or specified plant and any collateral adjustments to taxable income or tax liability. The collateral adjustments also must be made to any original or amended federal returns or AARs for any affected subsequent tax years.

Consistent with certain previous depreciation method changes, both the Form 3115 and amended return options previously discussed are available for property that is placed in service in prior periods, including the year immediately preceding the year of change (i.e., one-year property, as defined in Section 3.19 of Revenue Procedure 2015-13).

If a taxpayer revokes or makes a late election (as described later) and makes an accounting method change for the same depreciable property or specified plant, Revenue Procedure 2020-50 requires the taxpayer to apply the late election or revocation first.

For property subject to the consolidated acquisition rules,² all parties to the transaction and the consolidated groups to which those parties belong as of the relevant dates must change their accounting methods for depreciation of the property and specified plants to utilize the same manner (i.e., an amended return or an accounting method change). ³ Similar rules apply to the consolidated acquisition rules of both the 2020 final regulations and the 2019 proposed regulations. For members of consolidated groups, the change is made by the agent for the group.

Subsequent/additional accounting method change to implement bonus depreciation regulations

Revenue Procedure 2020-50 allows taxpayers that previously made an accounting method change to comply with the 2020 or 2019 final regulations, or the 2019 final and proposed regulations, for depreciable property placed in service during the same tax year and specified plants planted or grafted during the same planting year to make another change to comply with those regulations. Revenue Procedure 2020-50 considers this method change a permissible-to-permissible method change that may be made by filing a Form 3115 with the taxpayer's timely filed original federal income tax return or Form 1065 under the automatic change procedures of Revenue Procedure 2015-13. The accounting method change is made on a cut-off basis. This accounting method change is generally automatic (DCN 247).

Late elections and consent to revoke elections

Taxpayers may make late elections under IRC Section 168(k)(5), IRC Section 168(k)(7) or IRC Section 168(k)(10), late component elections, late designated-transaction elections not to apply the consolidated acquisition rules of the 2020 final regulations or late proposed-regulation-component elections (in conjunction with their adoption of the 2020 final regulations, 2019 final regulations, or adoption of the 2019 final and proposed regulations). The late elections are made by filing a Form 3115: (1) with their timely filed original federal income tax returns or Forms 1065 for their first or second tax year succeeding the tax year in which they placed the property in service or planted the specified plant, or (2) if later, with the timely filed original federal income tax return or Form 1065 that is filed on or after November 6, 2020, and on or before December 31, 2021. This change is generally automatic via modifications made to existing DCN 245, which was originally set forth in Revenue Procedure 2020-25.⁴

Alternatively, taxpayers may make the late election by filing an amended federal income tax return or amended Form 1065 for the placed-in-service year of the property or the planting year of the specified plant on or before December 31, 2021. The amended return or Form 1065, however, cannot be filed later than the applicable period of limitations on assessment for the tax year for which the amended return is being filed. The same rules apply to BBA partnerships, except they may file an AAR instead of an amended return. The amended return or AAR must include adjustments to taxable income for the late election and any collateral adjustments to taxable income or tax liability. Taxpayers must make the collateral adjustments to original or amended returns or AARs for subsequent tax years.

Taxpayers also may follow these procedures to revoke an IRC Section 168(k)(5) election, IRC Section 168(k)(7) election, IRC Section 168(k)(10) election, or component election under the proposed regulations. If the revocation is granted for an IRC Section 168(k)(7) election, the revocation will apply to all property included in the class of property and placed in service during the same tax year. If a taxpayer revokes an IRC Section 168(k)(10) election, the revocation will apply to all qualified property acquired after September 27, 2017, and placed in service during the taxpayer's tax year that includes September 28, 2017. Additionally, the revocation will apply to all specified plants that are planted or grafted to a plant that was planted after September 27, 2017, in the ordinary course of the taxpayer's farming business during its tax year that includes September 28, 2017, if the taxpayer made an IRC Section 168(k)(5) election for that tax year.

Implications

Revenue Procedure 2020-50 represents the final piece of guidance anticipated by practitioners and taxpayers looking to apply the bonus depreciation provisions first set forth by the Tax Cuts and Jobs Act (TCJA) and modified in part by the Coronavirus Aid, Relief, and Economic Security Act and related guidance (e.g., Revenue Procedure 2020-25). As noted, Revenue Procedure 2020-50 requires a taxpayer to employ the 2020 final regulations, 2019 final regulations, or 2019 final and proposed regulations in their entirety in a consistent manner.

Taxpayers should consider modeling the impact of potential alternative approaches that can be implemented in different tax years, given the choice of amending returns or filing method changes. Of specific note, this guidance provides a myriad of options to taxpayers seeking to employ the regulations' generally taxpayer-favorable approaches to issues such as:

1. Property constructed on behalf of the taxpayer by a third party, which is generally treated as acquired when construction begins and not when a written binding contract to acquire that property is entered
2. Utilization of the component election to take bonus depreciation under the favorable bonus depreciation provisions of the TCJA (for larger self-constructed property that is not eligible for bonus depreciation under the TCJA)
3. The look-back rule for determining whether a taxpayer or its predecessor had a depreciable interest in used property

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ENDNOTES

¹ If floor plan financing indebtedness is involved, the IRS will only grant consent to make the accounting method change if the IRC Section 481(a) adjustment " … is adjusted to account for the proper amount of interest expense, taking into account the business interest limitation under [IRC Section] 163(j) and [its regulations], as of the beginning of the year of change."

² The consolidated acquisition rules generally apply when an intercompany acquisition (or deemed acquisition) of depreciable property is followed by a related acquisition by a third party.

³ For purposes of determining whether the method change procedures apply, any property subject to these rules is treated as owned by a taxpayer at the beginning of the year of the method change if any party to the transaction owned such property at that time.

⁴ Taxpayers may still make and/or revoke certain elections under the provisions of Revenue Procedure 2020-25 without adopting the regulations provided they comply with the provisions of Revenue Procedure 2020-25, as modified by Revenue Procedure 2020-50.