IRS releases Rev. Proc. 2020-25: Adjustments to QIP depreciation

The TCJA established the “Qualified Improvement Property” classification, replacing the three previous classifications for non-residential improvements: Qualified Leasehold Improvements, Qualified Restaurant Property, and Qualified Retail Improvement Property.  

QIP was meant to be 15-year property eligible for bonus depreciation, but an error in the statute gave it a 39-year depreciable life, making it ineligible. 

The CARES Act corrected that error so that QIP is now 15-year property and eligible for 100% bonus depreciation through 2022. The change is effective for tax years beginning after Dec. 31, 2017. 

QIP is defined as “any improvement made by the taxpayer to an interior portion of a building which is nonresidential real property if such improvement is placed in service after the date such building was first placed in service.” It excludes costs for elevators, escalators, structural framework, or building expansions. The CARES act added the words “made by the taxpayer” to the definition. 

Revenue Procedure 2020-25 provides procedural guidance allowing taxpayers to change depreciation under Section 168 for QIP placed in service after Dec. 31, 2017, in its taxable year ending in 2018, 2019, or 2020. Additionally, for the 2018, 2019, or 2020 tax years, this revenue procedure allows a taxpayer to make a late election, or to revoke or withdraw an election, under the following sections:

• Section 168(g)(7) [use of the alternative depreciation system (ADS)]
• Section 168(k)(7) [election out of bonus depreciation]

NOTE: Rev. Proc. 2020-25 does not apply to:

• Taxpayers that made a late election, or withdrew an election under Section 163(j)(7)(B) (electing real property trade or business) or Section 163(j)(7)(C) (electing farming business) in accordance with Revenue Procedure 2020-22. Any QIP depreciation adjustments for the year of the late election or withdrawal under Section 163(j)(7)(B) or (C) are made pursuant to Revenue Procedure 2020-22 on an amended tax return or Administrative Adjustment Request (AAR).
• QIP for which the taxpayer deducted or deducts the costs or other basis as an expense (e.g., by application of the tangible property regulations).

Specific procedures

In order to change depreciation under Section 168 for QIP and/or to make a late election or revoke an election under Section 168(g)(7) or (k)(7) per the above, generally taxpayers may do the following:

1. File an amended tax return;

2. File Form 3115, “Application for Change in Accounting Method”; or

3. File an AAR (in the case of a BBA partnership).

Note that the withdrawal of an election under Section 168(g)(7) may only be done by filing an amended return or AAR, not by filing a Form 3115. 

Filing Form 3115

This revenue procedure modifies Revenue Procedure 2019-43 by adding two new automatic method changes:

1. The designated change number (DCN) 244 covers the changes in depreciation of QIP placed in service after Dec. 31, 2017. 

2. The DCN 245 covers the changes associated with making a late election out of bonus depreciation, revoking an “election out” of bonus depreciation and/or a late election to use ADS. 

Under these new sections, Form 3115 has reduced filing requirements, and certain eligibility rules are temporarily inapplicable. See Revenue Procedure 2020-25 for more information on the exact Form 3115 requirements.

Taxpayers should consult their tax advisors to review their facts and determine the best course of action. For many taxpayers, filing Form 3115 may be the most efficient and fastest way to get the benefit(s) associated with QIP and to make or revoke related elections. However, situations may exist where filing an amended tax return may be a better option (e.g., if a taxpayer is already amending a tax return for other items). Contact our National Tax Office to discuss your options or for assistance with the preparation of any necessary filings.

Patrick Duffany, JD, CPA, Managing Partner, Tax

959.200.7270

Brian Newman, CPA, Partner, Practice Leader, Federal Tax Services

959.200.7009

Richard Shevak, JD, Principal, National Tax

862.245.5029

Travis Butler, Director, National Tax

312.508.5821

Derek Weaver, Senior Manager, National Tax

301.280.2727

Timothy McMillan, CPA, Manager, National Tax

973.364.7706