In a new private letter ruling (PLR 201709007), the IRS gave a company additional time to claim bonus depreciation, which allows a business to take an immediate first-year deduction of 50 percent on the purchase of eligible property.
Importantly, the request for additional time to claim bonus depreciation was made well after the company filed its federal income tax return and depreciation was initially claimed. Further, the request was made after an outside advisor identified that the company initially made the wrong election following the advice of a former employee.
Specifically, the IRS found that a former employee had incorrectly advised the company to make the election to apply Code Section 168(k)(4), which allows a company to elect to accelerate alternative minimum tax (AMT) credits in lieu of bonus depreciation. Subsequently, the company engaged an outside advisor to review its previously filed returns, and the advisor concluded that claiming bonus depreciation beginning in 2008 would have been more advantageous.
The IRS allowed the taxpayer to retroactively claim bonus depreciation and to also revoke its previous election under Section 168(k)(4).
Background Regarding Bonus Depreciation Provisions
The circumstances present in the private letter ruling are not uncommon. The bonus depreciation provisions have changed significantly over the past 16 years, and as a result, many companies are confused about which elections are most beneficial to their particular tax situation.
Since 2001, Congress has provided additional first-year depreciation (or bonus depreciation) for certain property. Bonus depreciation provisions were enacted to “accelerate purchases of equipment, promote capital investment, modernization, and growth, and … help to spur an economic recovery.”
Bonus depreciation was initially provided in Section 168(k) for property placed in service subsequent to Sept. 11, 2001. Then, in response to the economic downturn in 2008, bonus depreciation was again used as a mechanism to stimulate the economy.
The rules have changed significantly over the past 16 years, with amendments to Section 168(k) in almost every year since enactment. These legislative changes have meant changes to rates (including 30 percent, 40 percent, 50 percent, and 100 percent provisions), eligible basis, and requirements regarding when the property is placed in service.
Under Section 168(k)(1) in its current form, bonus depreciation is generally available for certain property acquired after 2007 and before 2020 (for property with a longer production period, through 2021). For property placed in service between 2015 and 2017, bonus depreciation equals 50 percent of the adjustment basis of qualified property; in 2018, bonus depreciation falls to 40 percent; in 2019, it becomes 30 percent.
Bonus depreciation also allows significant flexibility regarding implementation. Section 168(k)(1) allows taxpayers to claim the full amount of bonus depreciation in the year the property is placed in service. Alternatively, Section 168(k)(7) allows taxpayers to forego bonus depreciation altogether by making an election for any class of property placed in service during a particular taxable year.
Additionally, Section 168(k)(4) allows taxpayers to elect to accelerate the use of AMT credits instead of claiming bonus depreciation. An election under either Section 168(k)(7) or Section 168(k)(4) remains in effect with respect to the class of property placed in service for that election year for future years until the election is revoked with the consent of the IRS.
Because of the numerous legislative changes to bonus depreciation, as well as the alternatives regarding bonus depreciation implementation, it is no surprise that taxpayers choose one approach to bonus depreciation when an original return is filed and then, with additional education and/or information, determine that another approach would be preferable.
For this reason, the IRS is periodically asked to evaluate whether an election into or out of bonus depreciation may be changed in a subsequent tax year. This determination requires the IRS’s consent, which can only be secured with a private letter ruling. Securing approval can be tricky because a taxpayer is required to demonstrate that it both (i) acted reasonably and in good faith; and (ii) the grant of relief will not prejudice the interests of the government.
The IRS recently granted a taxpayer permission to change an original election.
In PLR 201709007, a taxpayer was granted a 60-day extension to make the election under Section 168(k)(4)(I)(ii) not to apply Section 168(k)(4), and to revoke the election under Section 168(k)(4)(J)(iii) to apply Section 168(k)(4). The extension was granted assuming the taxpayer acted reasonably and in good faith, and because granting relief would not prejudice the government’s interests.
PLR 201709007 confirms the IRS’s standards for allowing late elections related to bonus depreciation; that is, the taxpayer’s ability to demonstrate not only that it acted reasonably and in good faith, but also that the ultimate grant of relief will not prejudice the interests of the government.
Consistent with prior rulings, the IRS demonstrated a continuing willingness to grant relief regarding the election (and revocation of the election) under Section 168(k). The ruling provides an important reminder that even when a taxpayer makes an affirmative election not to claim bonus depreciation, it may be possible to retroactively change that determination and claim bonus depreciation.
A number of rulings reach a similar conclusion, and these earlier rulings may provide a roadmap for a taxpayer considering a similar request.
About Ellen McElroy and Michael Resnick
Ellen McElroy is a partner in the Washington, DC, office of Eversheds Sutherland (US) LLP, where she regularly represents clients before the IRS, including representation at the IRS National Office with private letter rulings and technical advice. Michael Resnick is an associate in the Washington office of Eversheds Sutherland.