Rev. Proc. 2015-48: Retroactive 50% first-year “bonus” depreciation guidelines

Retroactive 50% first-year “bonus” depreciation

The IRS today released an advance version of Rev. Proc. 2015-48 as guidance relating to how to claim the 50% additional first year “bonus” depreciation for qualified property placed in service after December 31, 2013, in tax years ending in 2014. Today’s revenue procedure specifically provides guidance for taxpayers with a tax year beginning in 2013 and ending in 2014, and that filed their 2013 federal income tax returns before enactment of the “tax extenders” on December 19, 2014.

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Read text of Rev. Proc. 2015-48 [PDF 59 KB]

Background

A bonus depreciation deduction of 50% of the basis of qualified property is allowed, generally, by section 168(k).  The deduction expired for property placed in service after December 31, 2013.  It was reinstated retroactively, to apply to property placed in service after December 31, 2013, and before January 1, 2015.  The reinstatement was enacted on December 19, 2014, by the Tax Increase Prevention Act of 2014.

Many taxpayers that placed qualified property in service in calendar year 2014 filed their fiscal year or short year return that included the period in which the property was placed in service prior to the reinstatement, and did not claim bonus depreciation on that qualified property on the return.

A taxpayer is allowed to elect out of bonus depreciation for a class of property it places in service in a tax year (e.g., all 5-year property).  Generally, the election needs to be made on the timely filed (with extensions) return for the year the property is placed in service.  If a taxpayer fails to elect out of bonus, the taxpayer must reduce the basis of the qualified property by the amount of the allowable bonus depreciation deduction.

Relief for missed bonus depreciation, or missed elections not to take bonus depreciation

The guidance provided by Rev. Proc. 2015-48 applies to taxpayers that did not claim bonus depreciation on some or all of their qualified property placed in service in a fiscal year that covered portions of both calendar year 2013 and calendar year 2014 (2013 tax year) or a short year beginning and ending in calendar year 2014 (2014 short tax year).

A taxpayer that made an election out of bonus depreciation on its timely filed return for the 2013 tax year or the 2014 short tax year will have that election respected for the elected classes of property, unless it revokes the election under section 3.03 of Rev. Proc. 2015-48.  To do so, the taxpayer must file an amended tax return for the 2013 tax year or the 2014 short tax year by December 4, 2015, that claims bonus depreciation for the selected classes of property.  The due date for the revocation is extended if the tax return for the first tax year following the year of the election has not been filed by that date, and the revocation is allowed on an amended return filed before that following year’s return is filed.

KPMG observation

It is suggested that the taxpayer revoking the election under this provision include a statement explaining the revocation, and the classes of property to which it applies.

Actions required

A taxpayer that did not make an election out of bonus depreciation on its timely filed return for the 2013 tax year or the 2014 short tax year and did not deduct bonus depreciation for a class of property on that return (but did deduct some depreciation) will be deemed to have elected out of bonus for that class of property if it does not take some action by either:

  • Filing an amended return for the 2013 tax year or the 2014 short tax year, as applicable, before the due date for the following tax year.  If the taxpayer had both a 2013 tax year or the 2014 short tax year, filed timely returns for both years, and was in this situation for both tax years, the amended returns must be filed before filing the return for the first year succeeding the 2014 short taxable year, or
  • Filing a Form 3115, Application for Change in Accounting Method, with the timely filed federal return for the first or second tax year succeeding the 2013 tax year or the 2014 short tax year, as applicable.  A taxpayer in this situation for both years would have until the second tax year following the 2014 short tax year to include the Form 3115.  This rule is available only if the taxpayer owns the property at the beginning of the year for which the Form 3115 is filed.

Rev. Proc. 2015-48 states that a taxpayer that is not using one of the rules above, and that did not deduct bonus depreciation for a class of property for the 2013 tax year or the 2014 short tax year, or did not deduct bonus depreciation for some of all of its qualified property placed in service in calendar year 2014, “may claim” the deduction by following either of the procedures described above to avoid a deemed election out of bonus.

The taxpayer may not apply one treatment (i.e., electing out of bonus, or taking bonus) to property placed in service in calendar year 2013, within the 2013 tax year, and apply a different treatment to property placed in service in calendar year 2014, within the 2013 tax year.

Election to forego bonus depreciation for 2014 qualified property and take accelerated AMT credits

The Tax Increase Prevention Act of 2014 also reinstated the election under section 168(k)(4) to accelerate a corporate taxpayer’s ability to use certain amounts of alternative minimum tax (AMT) credits, in exchange for foregoing bonus depreciation.  The extension applies to qualified property placed in service in calendar year 2014 (i.e., property that became eligible for bonus depreciation by this legislation), referred to as “Round 4 Extension Property.”

A taxpayer that had an election under section 168(k)(4) in effect for property placed in service in calendar year 2013 (Round 3 Extension Property) is generally considered to have an election in effect for Round 4 Extension Property unless it elects out for Round 4 Extension Property.  A taxpayer that has an election in effect under section 168(k)(4) is required to compute its depreciation deduction without bonus depreciation, for all Round 4 Extension Property that is qualified property, and by using the straight-line method.  In exchange, additional amounts of alternative minimum tax credits, beyond the usual limitations, are allowed, and are refundable if they exceed tax liability for the year.

The procedures to elect out of section 168(k)(4) are complex.  Rev. Proc. 2015-48 provides that an affirmative election not to use the provision for Round 4 Extension Property, when the taxpayer had an election in effect to use the provision for Round 3 Extension Property, must generally be made by the due date (with extensions) for the first tax year ending after December 31, 2013.  However, a deemed election out of section 168(k)(4) is provided if the taxpayer (not in a controlled group of corporations) files its return for the first tax year ending after December 31, 2013, on or before December 4, 2015, and reports bonus depreciation on the Round 4 Extension Property on that return.  Other provisions of the revenue procedure cover other situations.

Rev. Proc. 2015-48 also explains how a corporation that did not previously elect to accelerate credits and forego bonus depreciation can make the election to do so for Round 4 Extension Property.

Election to apply section 179 to certain qualified real property in 2014

The Tax Increase Prevention Act of 2014 reinstated for tax years beginning in 2014 a provision that allows a taxpayer to elect to use the expensing provisions of section 179 against up to $250,000 of “qualified real property,” which is a portion of a building that is characterized as qualified leasehold improvements, qualified restaurant property, or qualified retail improvement property.  

The provision does not currently apply to property placed in service in tax years beginning in 2015.  Certain amounts for which an election was made for a year beginning before 2013, which the taxpayer was not able to deduct before 2014, were treated as depreciable property newly placed in service at the beginning of the first tax year beginning in 2014.  With the one-year extension, the previously unused carryover amounts could be expensed in 2014 (if the taxpayer is able to use the deduction).  

Rev. Proc. 2015-48 explains actions a taxpayer can take to either continue the conversion of an unused section 179 deduction into depreciable property in 2014, or to take the section 179 deduction in 2014 when it had reported the converted deduction as newly placed in service depreciable property on a previously filed 2014 return. 

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