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Retailers Get Choices for QIP Under IRS Guidance

Posted on Apr. 20, 2020

Taxpayers can choose whether they want to amend their tax returns or change accounting methods to make use of a retroactive bonus depreciation provision for upgrading building interiors.

Rev. Proc. 2020-25, 2020-19 IRB 1, issued April 17, provides the procedures for taxpayers looking to take advantage of the long-awaited retroactive technical correction to include qualified improvement property (QIP) in the Tax Cuts and Jobs Act’s 100 percent bonus depreciation regime.

The IRS’s guidance on the provision, tucked into the Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136) to correct an error in the TCJA, offers businesses powerful options that can either help leave them with more cash immediately or allow them to file an amended return to take advantage of reduced taxes from a prior year.  

The revenue procedure addresses QIP placed in service after December 31, 2017, including property acquired both before and after September 27, 2017. QIP acquired and placed in service between those two dates already qualified for the TCJA’s bonus depreciation. QIP acquired before September 27, 2017, can qualify for pre-TCJA bonus depreciation.

Evaluating the Options

Under Rev. Proc. 2020-25, a taxpayer looking to take advantage of the retroactive QIP fix generally has options for both how and when to make the changes.

The change to start taking bonus depreciation for QIP, late filing of elections, and revocation of elections can nearly all be done with either automatic accounting method changes or amended tax returns (or administrative adjustment requests for partnerships). Taxpayers looking to withdraw section 168(g)(7) elections only have the option of filing amended tax returns and administrative adjustment requests.

It will be critical for companies to evaluate the different impact that amending tax returns or filing accounting method changes will have on their past, present, and future tax positions, Ellen McElroy of Eversheds Sutherland (US) LLP  told Tax Notes.

McElroy said the filing of a change in accounting method for the 2019 tax year may reduce immediate cash tax liability, thereby improving a taxpayer's near-term liquidity. For other taxpayers, the ability to file an amended return for the placed-in service year of QIP "may provide the same, and in some cases better, results,”  she said.

Jane Rohrs of Deloitte Tax LLP said it was good to see alternative depreciation system elections under section 168(g)(7) included in the guidance along with elections out of bonus depreciation under section 168(k).

The accounting method change to start taking bonus depreciation on QIP after having declined to do so for 2018 and 2019 is a switch from an impermissible method of accounting to a permissible one.

Taxpayers have until October 15, 2021, for all the options, except for using an automatic method change to start taking bonus depreciation for QIP. Taxpayers can amend returns to make the switch only if they were filed before the revenue procedure’s release.

Lynn Afeman of KPMG LLP said it isn’t surprising that the accounting method change to start taking bonus depreciation for QIP is excluded from the October 15, 2021, deadline because that’s actually the normal rule and doesn’t need a sunset like the others. But Afeman said she was surprised that the IRS is being so generous with the options for taxpayers, particularly on elections that normally would require so-called 9100 relief. 

Changing Methods

The automatic method changes come with section 481(a) adjustments in nearly all situations. The only limitation is that method changes for revoking elections under section 168(k)(5), (7), or (10) or making late elections will get the adjustments only if they are made within the first two years after the subject property was placed in service.

The amended return option also allows for changes to taxable income because of application of bonus depreciation to QIP or the changed elections as well as any collateral consequences. 

“In treating these late elections as changes in methods of accounting with a corresponding section 481(a) adjustment, the Service has provided a creative, taxpayer-favorable solution to implement the CARES Act's correction of the QIP quagmire,”  McElroy said.

The QIP fix procedures in Rev. Proc. 2020-25 cannot be combined with special partnership filing relief or procedures for real estate and farming businesses electing out of the section 163(j) interest limitation. Those procedures also allow taxpayers to take advantage of relief provided by the CARES Act.

The revenue procedure both amended automatic accounting method changes already listed in the annually updated list (Rev. Proc. 2019-43, 2019-48 IRB 1107) and added two new changes to the list.

Rohrs noted that the new QIP method change has fewer restrictions than most automatic accounting method changes.

Afeman said she welcomes the waiver of the scope limitation that would normally prevent a taxpayer from making an automatic accounting method change less than five years after a prior automatic change.

The IRS is still working on other bonus depreciation procedural guidance for taxpayers interested in switching from the first set of proposed regs to the second set (REG-106808-19) and first set of final regs (T.D. 9874).

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