Corporation could revoke its election out of bonus depreciation

Plain-English summary

An S corporation placed three-year, five-year, and seven-year qualified property in service but elected not to claim additional first-year depreciation because its timely filed return showed an overall loss. After filing, its accounting firm identified a tax credit that had not been claimed and advised that claiming the credit would create tax liability. The existing Section 168(k)(7) election prevented bonus depreciation from offsetting that liability. The IRS found the revocation requirements satisfied and gave the corporation 60 days to revoke the election through a written statement attached to an amended return. The ruling did not decide whether any property actually qualified for bonus depreciation.

Ruling snapshot

• Question: Could the corporation revoke its election not to claim bonus depreciation for the property classes placed in service that year?
• Outcome: approved, with 60 days to file the revocation
• Key authorities: IRC § 168(k)(1), (2), (6), and (7); Treas. Reg. § 1.168(k)-2(f)

Full text (IRS public release)

 Internal Revenue Service                                       Department of the Treasury
                                                                Washington, DC 20224

 Number: 202410010                                              Third Party Communication: None
 Release Date: 3/8/2024                                         Date of Communication: Not Applicable
  Index Number: 9100.04-00
                                                                Person To Contact:
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 --------------------------------                               Refer Reply To:
                                                                CC:ITA:B07
                                                                PLR-116095-23
                                                                Date:
                                                                December 12, 2023


Re: Request to Revoke the Election Not to Deduct the Additional First Year
Depreciation

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

        This letter refers to a letter dated July 31, 2023, and supplemental information,
submitted on behalf of Taxpayer by Taxpayer’s authorized representative, requesting
the consent of the Commissioner of Internal Revenue to revoke Taxpayer’s election
under § 168(k)(7) of the Internal Revenue Code not to deduct any additional first year
depreciation that was made on its federal tax return for the Taxable Year. This letter
ruling is being issued electronically, as permissible under section 7.02(5) of Rev. Proc.
2023-1, 2023-1 I.R.B. 1, 35.

       Unless provided otherwise, all references in this letter ruling to § 168(k) are treated
as a reference to § 168(k) as in effect after amendment by the Tax Cuts and Jobs Act,
Pub. L. 115-97, 131 Stat. 2054 (December 22, 2017). Further, all references to
§ 1.168(k)-2 of the Income Tax Regulations are treated as a reference to the final §
1.168(k)-2 regulations published in the Federal Register on November 10, 2020 (85 FR
71734).

PLR-116095-23                                 2


                                          FACTS

       Taxpayer, an S corporation, is treated as a partnership for Federal income tax
purposes and files a Form 1120-S, U.S. Income Tax Return for an S Corporation, on a
calendar year basis (Form 1120-S). Taxpayer’s overall method of accounting is the
accrual method. Taxpayer timely filed its Form 1120-S for the Taxable Year. Taxpayer
is engaged in the X business.

        Taxpayer placed in service qualified property in the 3-year class, 5-year class,
and 7-year class during the Taxable Year. However, Taxpayer made an election under
§ 168(k)(7) not to deduct the additional first year depreciation for all eligible classes of
qualified property on its Form 1120-S for Taxable Year.

       Firm worked with Taxpayer’s Chief Financial Officer to prepare Taxpayer’s Form
1120-S for the Taxable Year. Taxpayer’s Form 1120-S for the Taxable year reflected an
overall loss. As a result, Taxpayer made the election not to deduct the additional first
year depreciation for all classes of eligible property on its Form 1120-S for the Taxable
Year.

        After Taxpayer’s Form 1120-S was filed, Firm informed Taxpayer’s officers that
Taxpayer was eligible for a tax credit for the Taxable Year that was not claimed on
Taxpayer’s Form 1120-S. Firm advised Taxpayer that claiming the credit will result in a
tax liability for the Taxable Year. Firm further advised Taxpayer that because the §
168(k)(7) election not to claim additional first year depreciation for the qualified property
was made for the Taxable Year, Taxpayer was not permitted the depreciation deduction
to offset the tax liability.

                                  RULING REQUESTED

      Accordingly, Taxpayer requests consent to revoke its § 168(k)(7) election not to
deduct additional first year depreciation under § 168(k)(1) for the property in the above-
mentioned classes that Taxpayer placed in service during the Taxable Year.

                                   LAW AND ANALYSIS

       Section 168(k)(1) allows, for the taxable year in which qualified property is placed
in service, an additional first year depreciation deduction equal to the applicable
percentage of the adjusted basis of that qualified property.

        For qualified property acquired by a taxpayer after September 27, 2017,
§ 168(k)(6)(A)(i) and (B)(i) provide that the applicable percentage is 100 percent for
qualified property placed in service by the taxpayer after September 27, 2017, and
before January 1, 2023 (before January 1, 2024, for qualified property described in

PLR-116095-23                                  3

§ 168(k)(2)(B) and (C)).

        Section 168(k)(7) 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.
Section 1.168(k)-2(f)(1)(i) provides that if this election is made, the election applies to all
qualified property that is in the same class of property and placed in service in the same
taxable year, and no additional first year depreciation deduction is allowable for the
property placed in service during the taxable year in the class of property, except as
provided in § 1.743-1(j)(4)(i)(B)(1). The term "class of property" is defined in § 1.168(k)-
2(f)(1)(ii) as meaning, among other things, each class of property described in § 168(e)
(for example, 5-year property).

      Section 1.168(k)-2(f)(5) provides that an election under § 168(k)(7), once made,
may generally be revoked only by filing a request for a private letter ruling and obtaining
the Commissioner of Internal Revenue's written consent to revoke the election. The
Commissioner may grant a request to revoke the election if the taxpayer acted
reasonably and in good faith, and the revocation will not prejudice the interests of the
Government.

                                    CONCLUSION

       Based solely on the facts and representations submitted, we conclude that the
requirements of § 1.168(k)-2(f)(5) have been satisfied. Accordingly, Taxpayer is
granted 60 calendar days from the date of this letter to revoke its election not to deduct
any additional first year depreciation for the above-mentioned classes of qualified
property placed in service by Taxpayer during the Taxable Year. The revocation must
be made in a written statement filed with Taxpayer’s amended federal tax return for the
Taxable Year.

      Additionally, a copy of this letter should be attached to such amended return. A
taxpayer filing its federal return electronically may satisfy this requirement by attaching a
statement to their return that provides the date and control number of the letter ruling.

        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 (1) whether any item of depreciable property placed in service
by Taxpayer during the Taxable Year, is eligible for the additional first year depreciation
deduction under § 168(k), or (2) if any item of such property is eligible for the additional
first year depreciation deduction, whether that item is qualified property as defined in
§ 168(k)(2).

      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

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material submitted in support of the request for ruling, 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 on file with this office, we are sending a
copy of this letter ruling to Taxpayer’s authorized representatives. We are also sending
a copy of this letter ruling to the appropriate IRS operating division director.

                                                    Sincerely,


                                                    ELIZABETH R. BINDER
                                                    Senior Counsel, Branch 7
                                                    Office of Associate Chief Counsel
                                                    (Income Tax & Accounting)


Enclosure:
copy of this letter for section 6110 purposes

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