Partnership may opt leasehold improvements out of bonus depreciation

Plain-English summary

A partnership that leased office and retail space initially reported certain property as nonresidential real property. It later determined that the property should have been classified as qualified leasehold improvement property and received consent to change its accounting method. Because the property had not originally been classified in the bonus-depreciation-eligible class, the partnership had not elected that class out of bonus depreciation. The IRS granted until 60 days after the ruling, or the earlier expiration of the assessment period, to file an amended return electing out for all qualifying leasehold improvement property placed in service during the year.

Ruling snapshot

• Question: Could a partnership make a late election out of bonus depreciation after reclassifying property as qualified leasehold improvement property?
• Outcome: Approved
• Key authorities: IRC § 168(k); Treas. Reg. §§ 1.168(k)-1(e), 301.9100-1, 301.9100-3

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201548008 Third Party Communication: None
Release Date: 11/27/2015 Date of Communication: Not Applicable
Index Number: 9100.04-00
Person To Contact:
-----------------------, ID No. ----------------
Telephone Number:
--------------------
Refer Reply To:
---------------------------------- CC:ITA:7
----------------------------------- PLR-107078-15
-------------------------------- Date:
-------------------------- August 24, 2015

Re: Request for Extension of Time to Make the Election Not to Deduct the Additional
First Year Depreciation

Legend

Taxpayer = -----------------------------------
------------------------
Date1 = --------------------------
Date2 = ---------------------------
Date3 = ----------------------
Date4 = ---------------------
Date5 = ---------------------------
Year1 = ------

Dear --------------:

  This letter responds to a letter dated January 20, 2015, and supplemental

correspondence, submitted by Taxpayer, requesting an extension of time pursuant to
§ 301.9100-3 of the Procedure and Administration Regulations to make the election
under § 168(k)(2)(D)(iii) of the Internal Revenue Code not to deduct the additional first
year depreciation deduction under § 168(k)(1) for all qualified leasehold improvement
property placed in service in the taxable year ended Date1 (the Year1 taxable year).

                                                FACTS

     Taxpayer represents that the facts are as follows:

PLR-107078-15 2

    Taxpayer is a limited liability company classified as a partnership for Federal

income tax purposes. Taxpayer uses an overall accrual method of accounting and files
its Federal income tax return on a calendar-year basis. Taxpayer is engaged in leasing
office and retail space to tenants.

    Taxpayer timely filed Form 1065, U.S. Return of Partnership Income, on or

around Date2, for the Year1 taxable year. On the Form 4562, Depreciation and
Amortization (Including Information on Listed Property), attached to that return,
Taxpayer reported that it placed in service both 7-year property and nonresidential real
property, and claimed the additional first year depreciation deduction for 7-year property
that is qualified property.

    Taxpayer subsequently discovered that certain property reported as

nonresidential real property on Taxpayer’s Year1 Form 1065, and placed in service in
Year1, should have been classified as qualified leasehold improvement property. On
Date3, Taxpayer filed a Form 3115, Application for Change in Method of Accounting, to
change the classification of this property from nonresidential real property to qualified
leasehold improvement property, beginning with the taxable year beginning on Date4.
By letter dated on the same date of this letter ruling, we granted consent to Taxpayer to
make this change in method of accounting in accordance with the terms and conditions
of that letter and Rev. Proc. 2015-13, 2015-5 I.R.B. 419.

   The period of limitations on assessment expires for Taxpayer’s Year1 taxable

year on or around Date5. Taxpayer did not make the election under § 168(k)(4) to
accelerate alternative minimum tax credits (and, if applicable, research credits) in lieu of
the additional first year depreciation deduction for any class of property placed in
service for any taxable year.

                              RULING REQUESTED

   Taxpayer requests an extension of time pursuant to § 301.9100-3 to make the

election under § 168(k)(2)(D)(iii) not to deduct the additional first year depreciation
provided under § 168(k)(1) for qualified leasehold improvement property that is qualified
property and placed in service in the taxable year ended Date1.

                              LAW AND ANALYSIS

   Section 168(k)(1) allows a 50-percent additional first year depreciation deduction

in the placed-in-service year for qualified property acquired by a taxpayer after
December 31, 2007, and before September 9, 2010, or acquired by a taxpayer
generally after December 31, 2011, and placed in service by the taxpayer before
September 9, 2010, or after December 31, 2011 (or December 31, 2012, for qualified
property described in § 168(k)(2)(B or (C)), and generally before January 1, 2015.
PLR-107078-15 3

   Section 168(k)(5) provides a 100-percent additional first year depreciation

deduction for the placed-in-service year for qualified property acquired by a taxpayer
after September 8, 2010, and generally before January 1, 2012, and placed in service
by the taxpayer after September 8, 2010, and before January 1, 2012 (or January 1,
2013, for qualified property described in § 168(k)(2)(B) or (C)). See section 3 of Rev.
Proc. 2011-26, 2011-16 I.R.B. 664, 665.

   Section 168(k)(2)(D)(iii) provides that a taxpayer may elect not to deduct the

additional first year depreciation for any class of property placed in service during the
taxable year. The term “class of property” is defined in § 1.168(k)-1(e)(2) of the Income
Tax Regulations as meaning, among other things, qualified leasehold improvement
property as defined in § 1.168(k)-1(c) and depreciated under § 168. Section 1.168(k)-
1(e)(2)(iv). See section 5.01 of Rev. Proc. 2008-54, 2008-2 C.B. 722, and section 3.01
of Rev. Proc. 2011-26, 2011-16 I.R.B. at 665 (rules similar to the rules in § 1.168(k)-1
for “qualified property” or for “30-percent additional first year depreciation deduction”
apply for purposes of § 168(k) as currently in effect).

   Section 1.168(k)-1(e)(3)(i) provides that the election not to deduct additional first

year depreciation must be made by the due date (including extensions) of the federal
tax return for the taxable year in which the property is placed in service by the taxpayer.

    Section 1.168(k)-1(e)(3)(ii) provides that the election not to deduct additional first

year depreciation must be made in the manner prescribed on Form 4562, Depreciation
and Amortization, and its instructions. The instructions to Form 4562 for the taxable
year ended Date1, provided that the election not to deduct the additional first year
depreciation is made by attaching a statement to the taxpayer’s timely filed tax return
indicating that the taxpayer is electing not to deduct the additional first year depreciation
and the class of property for which the taxpayer is making the election.

   Under § 301.9100-1, the Commissioner has discretion to grant a reasonable

extension of time under the rules set forth in §§ 301.9100-2 and 301.9100-3 to make a
regulatory election.

   Sections 301.9100-1 through 301.9100-3 provide the standards the

Commissioner will use to determine whether to grant an extension of time to make an
election. Section 301.9100-2 provides automatic extensions of time for making certain
elections. Section 301.9100-3 provides extensions of time for making elections that do
not meet the requirements of § 301.9100-2.

    Section 301.9100-3(a) provides that requests for relief under § 301.9100-3 will be

granted when the taxpayer provides evidence to establish to the satisfaction of the
Commissioner that the taxpayer acted reasonably and in good faith, and the grant of
relief will not prejudice the interests of the government.
PLR-107078-15 4

                                  CONCLUSION

    Based solely on the facts and representations submitted, we conclude that the

requirements of § 301.9100-3 have been satisfied. Accordingly, Taxpayer is granted 60
calendar days from the date of this letter or, if earlier, until the date on which the period
of limitations on assessment for Taxpayer’s Year1 taxable year expires, to make the
election not to deduct the additional first year depreciation under § 168(k)(1) for
qualified leasehold improvement property placed in service by Taxpayer during the
taxable year ended Date1, that qualify for the additional first year depreciation
deduction. This election must be made by Taxpayer filing an amended federal tax
income tax return for such taxable year, with a statement indicating that Taxpayer is
electing not to deduct the additional first year depreciation for all qualified leasehold
improvement property that is qualified property and placed in service during that taxable
year.

   Except as specifically set forth above, we express no opinion concerning the

federal tax consequences of the facts described above under any other provisions of
the Code (including other subsections of § 168). Specifically, no opinion is expressed
or implied on whether any item of depreciable property placed in service by Taxpayer
during the taxable year ended Date1, is eligible for the additional first year depreciation
deduction or whether the items of property classified by Taxpayer are qualified
leasehold improvement property as defined in §§ 168(e)(6), 168(k)(3), and 1.168(k)-
1(c).

  This letter ruling is directed only to the taxpayer requesting it. Section 6110(k)(3)

provides that it may not be used or cited as precedent.

 In accordance with the power of attorney, we are sending copies of this letter to

Taxpayer’s authorized representatives.

                                              Sincerely,

                                              Kathleen Reed

                                              KATHLEEN REED
                                              Branch Chief, Branch 7
                                              Office of Associate Chief Counsel
                                              (Income Tax and Accounting)

Enclosures (2):
Copy of this letter
Copy for § 6110 purposes