When you think about real estate, you may not think about bonus depreciation. You should. And you should do so now. Time may be running out to get this retroactively.
Connecting the Dots
In 2014, the tangible property regulations sanctioned component depreciation. The regulations confirmed that real estate is not just land and buildings. It is land, building, structural components, land improvements, and personal property. Each has a different class life.
In 2017, the Tax Cuts and Jobs Act (“TCJA”) authorized 100% bonus depreciation for new and used property. This benefit is available for property with a class life of 20 years or less.
In 2020, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act provided that qualified improvement property has a class life of 20 years. The change was retroactive back to the date the TCJA was enacted (effective 9/27/2017).
The cumulative effect is that real estate, even used real estate, can qualify for 100% bonus depreciation.
Many taxpayers, and even seasoned tax practitioners, have and are, missing this opportunity.
It Is All About Timing
The IRS issued a series of revenue procedures to implement the tangible property regulations. It did the same with the TCJA. It has now done the same with the CARES act.
These revenue procedures focus on allowing taxpayers time to adjust to the new laws. They do so by allowing taxpayers to automatically make accounting method changes by simply filing a form (Form 3115) with their tax return.
Bonus depreciation is mandatory. If the taxpayer qualifies, the taxpayer must take the bonus. The exception is if the taxpayer makes an affirmative election out of bonus depreciation. For property placed in service in 2016-2017, IRS Rev. Proc. 2019-33 says that taxpayers are deemed to have made an election out of bonus depreciation if they fail to take bonus depreciation. If a taxpayer reported straight-line depreciation, they made the election automatically.
For property placed in service in 2018-2020, there is no deemed election out of bonus depreciation. Absent an election out of bonus depreciation, a taxpayer who placed property in service in 2018-2020 and failed to take bonus depreciation has filed an 'incorrect tax return.' As an example, this may have happened as “QIP” (Qualified Improvement Property) did not qualify for bonus depreciation initially. Congress made the change retroactively in 2020. These taxpayers generally only have three years from the date the tax return was filed to file amended returns to take the missed bonus depreciation. After this time, they may have to obtain permission from the IRS to make the change.
But what about those who elected out of the bonus? IRS Rev.Proc 2020-25 addresses this. The revenue procedure says that a deemed election out for 2016-2017 or an actual election out 2018-2020 can be corrected with timely-filed original returns (not amended returns) filed on or after April 17, 2020, and on or before October 15, 2021. For most calendar year taxpayers the correction must be made in either March or April of 2021.
Also, additional guidance was issued in IRS Rev.Proc 2020-50. The only way to go back and file for the bonus depreciation is to request ‘9100 relief’, but there are no guarantees the IRS will grant it.
Conclusion
Whether you opted out of bonus depreciation or not, if you acquired or built a building between 2016 and 2020 that was put on straight-line depreciation, now is the time to fix it, and this is your last chance. After the 2020 tax year, it may not be as easy to go back and claim the valuable tax benefit. In some cases, it may not be possible at all. Also, think of the benefits that you could use by coupling the bonus depreciation (losses) with the CARES Act and carry those losses back to five previous tax years. It could be immediate cash flow for those who are needing it during these COVID times.
About the Author:
Kim Lochridge, Exec. VP at Engineered Tax Services
Kim Lockridge
Kim Lochridge is Executive Vice President for Engineered Tax Services, Inc. (ETS), an industry-leading provider of specialty tax services in the United States. Kim possesses a powerful combination of real-world business management skills, with a fundamental understanding and practical application of tax codes as they relate to real estate, and energy efficiency incentives. This knowledge and experience have uniquely positioned her as a big-league tax expert for Fortune 500, high net worth individuals, ultra-high net worth individuals, single and multiple family offices, architects, and CPAs nationwide.
Ms. Lochridge spent over a quarter of a century starting, acquiring, operating, and selling businesses, many of which had important roles within the real estate and energy industry. Kim is also a frequent multi-national speaker in the investment, private wealth, and family office spaces where she altruistically shares her expertise with others.
For comments, questions, or a portfolio review reach out to Kim Lochridge at klochridge@engineeredtaxservices.com.