In April, the IRS provided guidance by which taxpayers may take advantage of the retroactive changes to Secs. 168(e) and (g) by the Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136, to the depreciation treatment of qualified improvement property (QIP). QIP is generally any improvement (other than an enlargement, improvement of a building's structural framework, or an elevator or escalator) to the interior of a building that is nonresidential real property.
The CARES Act designated QIP as 15-year property under Sec. 168(e)(3)(E), from which it had been unintentionally omitted in amendments by the law known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97. Under the TCJA before amendment by the CARES Act, QIP placed in service after 2017 was treated as nonresidential real property, which is depreciated over 39 years by the straight-line method and, unlike 15-year property, ineligible for bonus depreciation. The CARES Act fixed this so-called retail glitch.
Under Rev. Proc. 2020-25, certain taxpayers can elect to take 100% bonus depreciation on the QIP by filing an amended return, an administrative adjustment request (AAR) under Sec. 6227, or a Form 3115, Application for Change in Accounting Method, to change their depreciation of QIP placed in service after Dec. 31, 2017, in the taxpayers' 2018, 2019, or 2020 tax year.
The revenue procedure also allows a taxpayer to make a late election, or to revoke or withdraw an election, under Sec. 168(g)(7), (k)(5), (k)(7), or (k)(10) for the 2018, 2019, or 2020 tax year, for property placed in service by the taxpayer during its 2018, 2019, or 2020 tax year, for a limited period. Because of the administrative burden of filing amended returns and AARs, the IRS will in addition treat the making of a late election under Sec. 168(g)(7), (k)(5), (k)(7), or (k)(10), or the revocation of the revocable election under Sec. 168(k)(5), (k)(7), or (k)(10), for property placed in service by taxpayers during their 2018, 2019, or 2020 tax years, as a change in method of accounting with a Sec. 481(a) adjustment for a limited period.
Except as provided in Rev. Proc. 2020-23, taxpayers or partnerships may file an amended income tax return or Form 1065, U.S. Return of Partnership Income, or make a late election or revoke or withdraw an election, for the QIP's placed-in-service year on or before Oct. 15, 2021, but not later than the applicable period of limitation on assessment for the tax year for which the amended return is filed.
- Rev. Proc. 2020-25
— By Paul Bonner, a JofA senior editor.