Some Taxpayers Would Rather Just Fix QIP Prospectively
There are some taxpayers who appreciate the qualified improvement property (QIP) technical correction but would still like the ability to leave their previously filed tax returns undisturbed.
On April 17 the IRS issued procedures (Rev. Proc. 2020-25, 2020-19 IRB 1) for taxpayers to implement the retroactive QIP technical correction from the Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136). Because the procedures allow taxpayers to choose, in many cases, between filing accounting method changes and amending returns, they were praised for their flexibility.
David Strong of Crowe LLP told Tax Notes that some taxpayers might not care much about treating QIP as 39-year property for tax years 2018 and 2019. In particular, partnerships with many K-1s may prefer to avoid the administrative expense of the retroactive fix, either with an accounting method change or by amending returns, he said.
It would be nice for taxpayers to have the option of leaving positions taken before the technical correction undisturbed without worrying about challenge on audit, Strong said. That could provide audit protection and the ability to make the change prospectively only on a cutoff basis, he said.
Tracy Watkins of RSM US LLP said she also has been seeing a lot of taxpayers who don’t want to disturb their prior treatment of QIP as 39-year property. “Not having that option provided for in the guidance was, I guess, disappointing, although I’m not surprised by it,” she said.
Watkins suggested the IRS consider 2018 and 2019 QIP as a special class of property. Not only have some of her clients wanted to avoid the administrative expense of making the changes provided in the new guidance, but others prefer the wider spread of depreciation deductions, she said. Taxpayers would appreciate if the IRS simply said it wouldn’t challenge 2018 and 2019 QIP positions that complied with the law before the technical correction, she said.
The Tax Cuts and Jobs Act expanded bonus depreciation under section 168(k) and increased it to 100 percent, but a drafting error left QIP as ineligible 39-year property. The CARES Act fixed that by moving QIP into the 15-year property category that the TCJA drafters had intended.
Watkins said it would have been nice for an electing real property trade or business to use the accounting method change option from Rev. Proc. 2020-25.
That revenue procedure excludes those changes because they must be made under a separate, specific set of procedures (Rev. Proc. 2020-22, 2020-18 IRB 1). Electing real property businesses trade away entitlement to bonus depreciation to avoid the section 163(j) interest deduction limitations.
The amended return and administrative adjustment request options that Rev. Proc. 2020-22 provides are useful only for closely held businesses, Watkins said. Other taxpayers, especially tiered partnerships, won’t find it practical to amend tax returns to undo the elections, she said.
Strong said that taxpayers who have filed both 2018 and 2019 tax returns would welcome clarification that they can amend their 2019 tax returns to include the accounting method change, rather than have to wait until filing their 2020 tax returns. He said that would be similar to an existing provision in the automatic accounting method change rules of Rev. Proc. 2015-13, 2015-5 IRB 419.
That option might be simpler because it would require only one amended tax return, Strong said.
Another welcome clarification could allow practitioners who started working on QIP accounting method changes under the existing list of changes to salvage that effort by accepting those requests rather than accepting only the new method change created by Rev. Proc. 2020-25, Strong said.
Time for Models
Watkins said the welcome flexibility provided by Rev. Proc. 2020-25 would be helpful when modeling how each taxpayer could best balance the new QIP provision with net operating loss and interest limitation issues. Another question is whether a section 481(a) adjustment for QIP would count as depreciation for determining the section 163(j) interest limitation, she said.
Strong said the wide range of options will definitely require practitioners to run models on how to take advantage of the QIP technical correction. For example, an immediate cash refund approach might involve using the increased depreciation deductions for a 2019 or 2020 tax year, meaning against a 21 percent corporate tax rate, he said. On the other hand, maybe an NOL could push the deductions back to 2017 when the corporate tax rate was still 35 percent, he said.
While it may be time to start building these models, it would be helpful to have the pending final and proposed section 163(j) regs, according to Strong. The models should also involve the TCJA’s international provisions, he said.
Both Strong and Watkins said that Rev. Proc. 2020-25 would be welcomed as a model for the procedural guidance on bonus depreciation that the government has been working on since before the coronavirus crisis. That guidance would provide procedures for taxpayers interested in switching from the first set of proposed regs (REG-104397-18) to the second set (REG-106808-19) and first set of final regs (T.D. 9874).
Strong praised the government for the flexibility of Rev. Proc. 2020-25 and said he hopes for similar options in the general bonus depreciation procedural guidance.
Watkins noted that some parts of Rev. Proc. 2020-25, particularly the election relief provisions, aren’t specific to QIP. Taxpayers could start making some of the changes they want using that revenue procedure, although they’ll still have to wait for anything involving 2017 and the liberalized self-constructed property rules, she said.