You’ve probably heard the news – the long-awaited technical correction of Qualified Improvement Property (QIP) status has arrived via the CARES Act. The legislation assigns QIP placed-in-service on or after 1/1/2018 a recovery period of 15-years, making it eligible for bonus depreciation. Under the Tax Cuts and Jobs Act, bonus rates are set at 100% for 2018-2022, and will subsequently decline to 80% in 2023, 60% in 2024, 40% in 2025, and 20% in 2026. (See our recent blog for more background).
This is a big win for taxpayers, who are naturally eager to know the next steps – how should previous tax year filings be corrected?
The Act only says that it corrects the QIP glitch, but it doesn’t specify ‘how’ to implement this correction.
However, there are certain assumptions that can be made unless or until we are told otherwise.
- Since this is depreciation-related, it is presumed that a Form 3115 Change in Accounting Method can be filed, given that the incorrect class life was used in a previous tax year.
- Also, it is reasonably assumed that an amended return can be filed.
There is one major caveat to using Form 3115 – the five year rule. Generally, a Form 3115 can be filed for a number of different method changes, but five years must elapse between filing a second 3115 using the same method change. If you filed a 3115 with a Method XYZ change, you would have to wait five years before filing a new 3115 with the same Method XYZ change. In our situation, changing from a a 39-year life to a 15-year life on QIP would be a Method 7 change. If someone had a cost segregation study performed in 2017 and filed a 3115 with a Method 7 change at that time, they presumably wouldn’t be able to make this current correction via 3115 until 2022.
There is currently no guidance from the government indicating they will be suspending the five year scope limitation on this issue. This would require a Revenue Procedure announcement creating some exception in this scenario.
Unless or until further guidance is released, Capstan believes that the Form 3115 and amended return routes are both viable so long as the taxpayer has not already filed a 3115 using the same method change in the last five years.
We will continue to monitor this evolving topic, and are here for any questions you may have.