Taxpayers who either jumped at the chance to write off 100% of business investments or failed to do so right after the 2017 tax reform bill passed can now take a second look at that decision. The IRS has issued guidance giving taxpayers great flexibility to go back and reverse some bonus depreciation elections for property acquired after September 27, 2017 and placed in service during a tax year that includes September 28, 2017.
For this 2017 property, taxpayers now can: 1) revoke a 100% bonus depreciation election, 2) make a new election for plants, such as fruit trees, or 3) elect to take only 50% bonus depreciation, under Rev. Proc. 2019-33, using procedures described below.
Retroactivity and Late Regulations
With the retroactive effective date of the depreciation changes in the Tax Cuts and Jobs Act (TCJA), taxpayers did not have much time to decide on whether electing bonus depreciation was the best thing to do. The December 2017 Act expanded bonus depreciation to a 100% write-off of business assets for five years, through 2022, for property placed in service from September 28, 2017 forward.
The IRS released regulations in August 2018 clarifying the new rules, including when used property is eligible for bonus depreciation and how to determine when property is “acquired.” (See earlier coverage.) Some taxpayer comments on the proposed rules noted that the time for making 2017 elections had already passed by the time the regulations came out, and, thus, taxpayers should be allowed to amend their returns. The IRS listened, and the new procedures not only allow some retroactive elections, but also simplify the process.
New Elections, but Act Fast
The IRS is allowing the following three types of additional first-year depreciation elections for property placed in service during the September 28, 2017 window.
- A taxpayer can elect not to deduct 100% bonus depreciation for all qualified property in the same asset class and placed in service by the taxpayer in the same tax year.
- A taxpayer can elect to deduct 50-percent, instead of 100%, bonus depreciation for the 2017 property.
- A taxpayer can elect to deduct bonus depreciation for any specified plant (as in fruits and nuts) that is planted after September 27, 2017 and before January 1, 2027 or grafted between those dates to a plant that has already been planted.
Taxpayers may make late elections or revoke elections already made by filing an amended return or a Form 3115, Application for Change in Accounting Method, for a limited period of time. It is important to act fast on reversing your earlier decisions on bonus depreciation. It also is important to consult with your tax advisor as to whether you should make or revoke an earlier election. The conventional wisdom is that taxpayers benefit from taking deductions as early as possible. However, sometimes accelerating deductions may not be beneficial, such as when you have expiring net operating losses or credit carryforwards you may lose. Also, if your current income is low, you may benefit from taking deferred depreciation deductions in future years, when your business income may be higher.
The timing of the TCJA put many businesses in the position of having to make critical investment decisions with little time for analysis or long-term planning. Now the IRS has given you an opportunity to reconsider those decisions and revisit your bonus depreciation elections. This is a rare opportunity to change your mind with the blessing of the U.S. tax authority. It is certainly worth taking a look.