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In Revenue Procedure 2022-23, the IRS allows taxpayers to make late elections under the modified accelerated cost recovery system (MACRS) for qualified Indian reservation property under IRC Section 168(j)¹ and qualified second-generation biofuel plant property under IRC Section 168(l).² Revenue Procedure 2022-23 also allows taxpayers to make a late election under IRC Section 181 for certain film, television, or live theatrical productions.³

Late elections under IRC Sections 168(j)(8), 168(l)(3)(D) and 181

Revenue Procedure 2022-23 applies to taxpayers that placed qualified Indian reservation property or qualified second-generation biofuel plant property in service after December 31, 2017 during the taxpayer's tax year ending in 2018 or 2019 (2018 or 2019 tax year). It also applies to taxpayers that own a qualified film, television or live theatrical production under IRC Section 181 commencing after December 31, 2017 and want to make a late IRC Section 181 election for their 2018 or 2019 tax year. Under IRC Section 181, "commencing" means incurring capitalizable costs, having a reasonable belief production will occur, and beginning principal photography.

To make a late election under IRC Section 168(j)(8), 168(l)(3)(D) or 181, taxpayers may file an amended federal income tax return or amended Form 1065, "US Return of Partnership," for the taxpayer's 2018 or 2019 tax year on or before December 31, 2022. The amended return or amended Form 1065, however, may not be filed after the applicable period of limitations has run for the tax year for which the amended return is being filed.

A partnership under the centralized partnership audit regime may file an administrative adjustment request (AAR) for the taxpayer's 2018 or 2019 tax year by the earlier of (1) December 31, 2022; or (2) the applicable limitations period for making adjustments under IRC Section 6235 for the reviewed year. The original or amended returns or AARs must include any collateral adjustments to taxable income or tax liability.

Alternatively, taxpayers may file a Form 3115, "Application for Change in Accounting Method," with their first or second timely filed original federal income tax return or Form 1065 filed after April 19, 2022.

The late election will be considered a change in accounting method with an IRC Section 481(a) adjustment.

Revenue Procedure 2022-23 also amends Revenue Procedure 2022-14 to add Section 6.23 to make the late elections an automatic change.

Implications

Revenue Procedure 2022-23 is part of the IRS's effort to give taxpayers additional opportunities to make elections that they either had limited or no opportunity to make on a timely filed original tax return, whether due to the timing of retroactive statutory changes or for other reasons.

Taxpayers with property described within Revenue Procedure 2022-23 should review whether making a retroactive election via either an amended return/AAR or an accounting method change would yield a favorable tax position for them based on their specific tax posture within an affected, or potentially affected, tax year.

For qualified IRC Section 181 property that has already been placed in service (i.e., commercially exploited), very little or no tax basis may remain in the property available within the current tax filing year, particularly if the taxpayer took bonus depreciation on that property. Accordingly, a change in method of accounting may not result in the deduction of a significant cost within the current tax filing year. However, filing an amended tax return to make the IRC Section 181 election may be beneficial if it creates or increases a net operating loss that can be carried back to pre-TCJA tax years, which had higher tax rates.

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ENDNOTES

¹ IRC Section 168(j) provides specific, shorter recovery periods for certain qualified Indian reservation property. The election under IRC Section 168(j)(8) allows a taxpayer to make an election not to apply IRC Section 168(j) (and instead apply normal MACRS recovery periods under IRC Section 168(c)) for all property that is in the same class of property and placed in service by the taxpayer in the same tax year.

² IRC Section 168(l) provides for 50% additional or "bonus" depreciation in the placed-in-service year specific to qualified second-generation biofuel plant property. The election under IRC Section 168(l)(3)(D) allows a taxpayer to make an election not to apply the 50% bonus depreciation to qualified second generation biofuel plant property that is in the same class of property and placed in service in the same tax year.

³ IRC Section 181 generally provides that a taxpayer may elect to treat the cost of any qualified film or television production, and any qualified live theatrical production, as an expense which is not chargeable to capital account. Any cost so treated shall be allowed as a deduction up to an amount equal to $15 million per production generally.