In August 2018, the IRS and Treasury Department issued proposed regulations in connection with the Tax Cuts and Jobs Act’s (TCJA) updates to Internal Revenue Code (IRC) Section 168(k), which allows for an additional first-year depreciation deduction for the cost of qualifying property in the year the property is placed in service (commonly referred to as “bonus depreciation”). The 2018 proposed regulations were modified and finalized in September 2019 (“2019 final regulations”), and new proposed regulations were also issued addressing additional items. In September 2020, final regulations were released that made certain clarifying changes to the 2019 final regulations, covered issues they did not address, and adopted rules contained in the 2019 proposed regulations
Taxpayers have flexibility when deciding which version of the above regulations to apply. On Nov. 6, the IRS published Revenue Procedure 2020-50, which provides procedural guidance and election relief for taxpayers that want to either adopt one of the above sets of regulations or change from one version of the regulations to another.
Overview of Revenue Procedure 2020-50
Under Revenue Procedure 2020-50, taxpayers that filed tax returns using the 2018 proposed regulations can switch to 1) the 2020 final regulations; 2) the 2019 final regulations; or 3) the 2019 proposed and 2019 final regulations. Additionally, taxpayers can change from one version of the regulations to another. Additionally, the revenue procedure allows these taxpayers to make a late election or to revoke an election under IRC Sections 168(k)(5), 168(k)(7), and 168(k)(10), and Treas. Reg. 1.168(k)-2(C).
The revenue procedure applies to certain depreciable property, including components of certain larger self-constructed property, that taxpayers acquired and placed in service during tax years ending on or after Sept. 28, 2017, and before the first tax year that begins on or after Jan. 1, 2021.
Revenue Procedure 2020-50 generally provides taxpayers with the ability to do the following:
1. A taxpayer that wishes to change to either the 2020 final regulations, 2019 final regulations, or a combination of the 2019 proposed regulations and 2019 final regulations is deemed to be changing from an impermissible method of accounting to a permissible method of accounting and is allowed to recognize a Section 481(a) adjustment. To make this change, the taxpayer may either: 1) File an amended tax return, or Administrative Adjustment Request (AAR) if applicable; or 2) File an automatic Form 3115, “Application for Change in Accounting Method,” using the new Designated Change Number (DCN) 246.
2. A taxpayer that files a 3115 change under Rev. Proc. 2020-50 – as described above – is permitted to, in a subsequent tax year, request a second change to a different version of the regulations. If a taxpayer makes a second change under Rev. Proc. 2020-50 to another version of the regulations, that change will be deemed to be a change from a permissible method of depreciation to another permissible method of depreciation. To make this change, the taxpayer would file an automatic Form 3115 using the new DCN 247. This change would be made on a cut-off basis; therefore, no Section 481(a) adjustment is computed.
3. If a taxpayer is already applying one of the above regulations or changes to one of the above regulations pursuant to Rev. Proc. 2020-50, it may make a late election, or revoke an election, under IRC Sections 168(k)(5), 168(k)(7), 168(k)(10), and Treas. Reg. 1.168(k)-2(C) for the tax year ending on or after Sept. 28, 2017, and before the taxpayer’s first tax year that begins on or after Jan. 1, 2021. To do so, the taxpayer would: 1) File an amended tax return, or AAR if applicable; or 2) File an automatic Form 3115 using DCN 245, which was introduced in Revenue Procedure 2020-25 in April 2020, and compute a Section 481(a) adjustment.
It should be noted that taxpayers with net operating losses (NOLs) cannot simply adjust their NOLs to change their method of accounting for any of the items discussed above. Such taxpayers are still required to file an amended return or Form 3115 as outlined in the revenue procedure.
Revenue Procedure 2020-50 also outlines ordering rules. If a taxpayer makes a late election or revokes an election, and also makes an accounting method change for the same depreciable property, the late election or the revocation should be applied first.
With regard to the new accounting method changes outlined above, Form 3115 has reduced filing requirements, and certain eligibility rules are temporarily inapplicable. See the full Revenue Procedure 2020-50 for more information on the form’s exact requirements.
Other areas discussed
Revenue Procedure 2020-50 also discusses one-year property, which is property placed in service by a taxpayer in the tax year immediately preceding the year in which a change in accounting method applies. For this property, the taxpayer may change from an impermissible to permissible method of determining depreciation by filing a Form 3115 and computing a Section 481(a) adjustment. The taxpayer can also file an amended return or AAR, if applicable, to accomplish this.
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