Clarification on the CARES Act continues to enlighten us on an almost daily basis. Qualified Improvement Property (QIP) placed-in-service after 12/31/2017 is now considered to have a recovery period of 15-year and is bonus-eligible. Taxpayers may retroactively change the depreciation of QIP under Section 168 and, for a limited time, may also choose to opt-into or revoke certain important elections, including Section 168 (g)(7) – use of the Alternative Depreciation System – and Section 168(k)(7) – election out of bonus depreciation.
One question continues to arise: How, exactly, do I implement these changes and correct 2018 or 2019 TY filings?
On Friday April 17th, the IRS released Rev. Proc. 2020-25 which guides taxpayers through three ways changes can be made.
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), there are three general options:
- File an amended tax return, due on or before 10/15/2021
- File Form 3115, “Application for Change in Accounting Method”*
- In the case of a BBA Partnership, file an AAR (Administrative Adjustment Request) by 10/15/2021
Scope Limitation Relief:
Form 3115 is a quick and efficient way to make changes, but taxpayers have been hindered by 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. However, Rev. Proc. 2020-25 removes the five year scope limit, permitting taxpayers to more easily employ Form 3115, and minimize the administrative burden of filing amended returns or AARs. Additionally, making or revoking elections are generally not considered “changes in accounting method,” but in another attempt to streamline this process, the IRS is allowing taxpayers to treat the making or revoking of these elections as a change in method of accounting with a section 481(a) adjustment.
The flexibility these changes allow are much appreciated, and next steps should be determined in consultation with your tax advisor. Each taxpayer must assess which, if any, of these “re-do” options are most favorable in their situation, and the best method by which to implement the changes.
*Revocation of an election under Section 168(g)(7) cannot be done via 3115.