REVENUE PROCEDURE 2019-33
On July 31, 2019, the IRS released Rev. Proc. 2019-33. This revenue procedure allows taxpayers to make or revoke certain elections for bonus depreciation under the Tax Cuts and Jobs Act of 2017 (TCJA) for the 2016 and 2017 tax years. The late and revoked elections create many opportunities to avoid pitfalls.
Pitfalls and Opportunities
This new revenue procedure allows taxpayers to make late elections or revoke bonus depreciation elections. It applies to certain property acquired by the taxpayer after September 27, 2017, and placed in service by the taxpayer during its taxable year that includes September 28, 2017.
- Taxpayers can make a late election not to deduct bonus depreciation for all qualified property in the same class of property placed in service in the same tax year.
- Taxpayers can make a late election to deduct 50 percent, (instead of 100 percent), bonus depreciation for all qualified property acquired and placed in service by the applicable dates.
- Taxpayers can make a late election to deduct bonus depreciation for any specified plant that is planted or grafted after September 27, 2017 and before 2027.
If a taxpayer did not make a formal election on its 2016 or 2017 return, but determined its depreciation deductions following one of these elections, it will have been deemed to have made the election. This creates a possible pitfall for taxpayers who filed returns with what is now a deemed election. Consider the following examples. .
Example 1: A taxpayer acquired and placed into service a building after September 27, 2017 but before the end of its 2017 tax year. At the same time, the taxpayer also acquired and placed into service a copier, a 5-year asset classified under asset class 00.13 of Rev. Proc. 87-56. on its 2017 tax return. The taxpayer did not claim bonus depreciation on the copier or make a formal election under Code section 168(k)(7). Under the deemed election provisions of §5.02(2) of Rev. Proc. 2019-33, the taxpayer will be deemed to have elected out of bonus depreciation for that class of property. In 2019, the taxpayer has a lookback cost segregation study on the building placed in service in 2017. Unless the taxpayer follows the procedural rules to revoke the deemed election under §168(k)(7), the taxpayer will not be permitted to deduct bonus depreciation on any 5-year assets identified in the cost segregation study.
Example 2: This example has the same basic facts as Example 1, but instead of claiming no bonus depreciation on the copier, the taxpayer claimed 50 percent bonus depreciation on it. In this situation, the taxpayer will be deemed to have made an election under §168(k)(10) to claim 50 percent bonus depreciation for all qualifying property placed in service during the 2017 tax year. When the taxpayer receives the results of the 2019 cost segregation study, all 5- and 7-year tangible personal property assets and all 15-year land improvement assets must use 50 percent bonus depreciation, unless the taxpayer revokes the deemed election.
As explained below, this new revenue procedure provides guidance on how to revoke these deemed elections. It also provides guidance on how to make late elections.
If the taxpayer has not yet filed its return for the first succeeding tax year after its 2016 or 2017 tax year, but has filed 2016 or 2017, it can file an amended 2016 or 2017 return (or an Administrative Adjustment Request (“AAR”) for Bipartisan Budget Act of 2015 (“BBA”) partnerships). It would also need to file an amended return or AAR for any subsequent periods to make any correlative adjustments arising from amending the 2016 or 2017 tax returns.
If the taxpayer has already filed its first subsequent return, it can file a new DCN 241 Form 3115, Application for Change in Accounting Method for the first, second, or third years after the 2016 or 2017 tax year. Only during this period will this be treated as a method change. This period also is the only time the change can be made with a §481(a) adjustment. Neither the previous change five-year item eligibility rule nor the final year of a trade or business eligibility rule applies to these changes. All changes may be made concurrently on the same Form 3115, but the single form must have a single, net §481(a) adjustment.