Partnership could reverse bonus depreciation after discovering state tax costs

Plain-English summary

A partnership claimed additional first-year depreciation on qualified property placed in service during a tax year. After the federal return deadline, the partnership and its return preparer discovered that the deduction created unfavorable state tax consequences for one owner. The preparer had not known about those consequences and had not advised an election out of bonus depreciation. The IRS found that the late-election relief standards were met and granted 60 days to file an amended federal return electing out for the relevant property. The ruling did not decide whether any particular asset qualified for additional first-year depreciation.

Ruling snapshot

• Question: Could the partnership make a late section 168(k)(7) election not to claim bonus depreciation?
• Outcome: approved, with 60 days to file an amended return and election statement
• Key authorities: IRC § 168(k)(7); Treas. Reg. §§ 1.168(k)-1(e), 301.9100-1, 301.9100-3; Rev. Proc. 2017-33

Full text (IRS public release)

Internal Revenue Service                                         Department of the Treasury
                                                                 Washington, DC 20224

Number: 201920006                                                Third Party Communication: None
Release Date: 5/17/2019                                          Date of Communication: Not Applicable
Index Number: 9100.04-00
                                                                 Person To Contact:
-----------------------------------------                        ------------------------, ID No. ------------------
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-----------------------------------                              Telephone Number:
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                                                                 Refer Reply To:
                                                                 CC:ITA:B07
                                                                 PLR-124535-18
                                                                 Date:
                                                                 February 15, 2019


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

LEGEND:

Taxpayer:                   ------------------------------------------------
----------------------------------------------------

Date:                      --------------------------

State:                     -------------

Business:                  ----------------------------------------------------------

Entity One:                 -------------------------------------------
                           -------------------------

Subsidiary One:             -------------------------------------------------------
                           -------------------------

Entity Two:                 -----------------------------------------------------------------
----------------------------------------------------

Subsidiary Two:             -----------------------------------------------------------------
                           -------------------------

Subsidiary Three:          -----------------------------------

PLR-124535-18                                               2

----------------------------------------------------

Property:                  ------------------------------------

Amount:                    -----------------

Firm:                      ------------------------------


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

        This letter responds to a letter dated August 9, 2018, submitted by Taxpayer
requesting an extension of time pursuant to § 301.9100-3 of the Procedure and
Administration Regulations to make the election not to deduct the additional first year
depreciation under § 168(k) of the Internal Revenue Code for certain classes of
qualified property placed in service in the taxable year ending Date.

      All references in this letter ruling to § 168(k) are treated as a reference to
§ 168(k) as in effect on the day before the date of the enactment of the Tax Cuts and
Jobs Act, Pub. L. No. 115-97, 131 Stat. 2054 (Dec. 22, 2017).

FACTS

         Taxpayer represents that the facts are as follows:

       Taxpayer is a limited liability company that is classified as a partnership for
Federal income tax purposes. Taxpayer files its federal tax returns on a calendar year
basis. Taxpayer’s overall method of accounting is the accrual method.

       Taxpayer owns and operates Business in State. Taxpayer is owned jointly by
Entity One (through Subsidiary One, a disregarded entity) and Entity Two (through
Subsidiary Two and Subsidiary Three).

        During the taxable year ending on Date, Taxpayer placed in service Property with
a total unadjusted basis of Amount, and that is qualified property under § 168(k)(2). On
its timely filed federal income tax return for its taxable year ended Date, Taxpayer
deducted the additional first year depreciation for the Property.

       Firm was engaged to prepare Taxpayer’s federal income tax return for the
taxable year ended Date. Entity One, Entity Two, and Subsidiary Two reviewed this
federal income tax return prior to its filing, but were not aware at that time of certain
unfavorable state tax implications to Entity One under State law stemming from
Taxpayer’s deduction of the additional first year depreciation on its federal income tax
return for the taxable year ending Date. These implications were discovered after the

PLR-124535-18                                 3

deadline for filing Taxpayer’s federal income tax return in connection with the
preparation of Entity One’s State income tax return.

        Firm also was not aware that Taxpayer’s claiming the additional first year
depreciation on its federal income tax return for the taxable year ending Date, would
result in unfavorable State tax implications that impacted Entity One. As a result, Firm
did not advise Taxpayer to make the election not to deduct the additional first year
depreciation for the Property placed in service during the taxable year ending Date.

RULING REQUESTED

      Taxpayer requests an extension of time pursuant to §§ 301.9100-1 and
301.9100-3 to make the election under § 168(k)(7) not to deduct the additional first year
depreciation under § 168(k) for all Property placed in service in the taxable year ending
Date.

LAW AND ANALYSIS

        Section 168(k)(1) allows, in the taxable year that qualified property is placed in
service, a 50-percent additional first year depreciation deduction for qualified property
placed in service by the taxpayer before January 1, 2020 (or January 1, 2021, for
qualified property described in §§ 168(k)(2)(B) or 168(k)(2)(C)).

       Section 168(k)(7) allows a taxpayer to elect not to deduct the additional first year
depreciation for any class of property placed in service by the taxpayer during the
taxable year.

       Section 4.04 of Rev. Proc. 2017-33, 2017-19 I.R.B. 1236, 1240, provides
guidance regarding the election under § 168(k)(7) not to deduct the additional first year
depreciation (the § 168(k)(7) election). Section 4.04(1) of Rev. Proc. 2017-33 provides
that the rules for making the § 168(k)(7) election are similar to the rules for making the
election under § 168(k)(2)(D)(iii) as in effect before the enactment of the Protecting
Americans from Tax Hikes Act of 2015 (PATH Act), enacted as Division Q of the
Consolidated Appropriations Act, 2016, Pub. L. No. 114-113, 129 Stat. 2242 (Dec. 18,
2015). As a result, the § 168(k)(7) election applies to all qualified property that is in the
same class of property and placed in service in the same taxable year. Section 4.04(2)
of Rev. Proc. 2017-33 provides that generally rules similar to the rules in § 1.168(k)-
1(e)(2), (3), (5) and (7) of the Income Tax Regulations apply for purposes of § 168(k)(7).

       Section 1.168(k)-1(e)(2) defines the term “class of property” for purposes of the
election not to deduct additional first year depreciation. Such term means, among other
things, each class of property described in § 168(e) (for example, 5-year property).

PLR-124535-18                                 4

       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 ending Date, 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 of Internal Revenue 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.

CONCLUSION

        Based solely on the facts and representations submitted, we conclude that the
requirements of §§ 301.9100-1 and 301.9100-3 have been satisfied. Accordingly,
Taxpayer is granted an extension of 60 calendar days from the date of this letter ruling
to make the election not to deduct the additional first year depreciation under §
168(k)(1) for all Property placed in service in the taxable year ending Date, that qualify
for the additional first year depreciation deduction. This election must be made by
Taxpayer filing an amended federal income tax return for that taxable year, with a
statement indicating that Taxpayer is electing not to deduct the additional first year
depreciation for Property placed in service by Taxpayer during that taxable year.

       In addition, a copy of this letter ruling must be attached to that amended return.
A copy is enclosed for that purpose. Alternatively, a taxpayer filing its federal income
tax return electronically may satisfy this requirement by attaching a statement to the
amended return that provides the date and control number of the letter ruling.

PLR-124535-18                                5

       Except as specifically set forth above, we express no opinion concerning the
federal income 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 ending Date, is eligible for the additional first year
depreciation deduction.

      The rulings contained in this letter are based upon information and
representations submitted by Taxpayer and accompanied by a penalty of perjury
statement executed by an appropriate party. While this office has not verified any of the
material submitted in support of the request for rulings, it is subject to verification on
examination.

      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 a copy of this letter
ruling to Taxpayer's authorized representatives. We also are sending a copy of this
letter ruling to the appropriate operating division director.

                                      Sincerely,

                                      Kathleen Reed

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



Enclosures:
      Copy of this letter
      Copy for section 6110 purposes