The IRS issued Rev. Proc. 2020-25 (available here) providing much-anticipated guidance for how taxpayers may take advantage of the retroactive change in the tax rules allowing for expensing of Qualified Improvement Property (QIP). QIP is improvements to interior parts of a nonresidential building (other than an enlargement placed in service after the building is placed in service by any taxpayer). The CARES Act corrected an earlier scrivener’s error ( known as the “retail glitch”) created in the Tax Cuts and Jobs Act that inadvertently omitted QIP from property eligible for expensing. The CARES Act fix is retroactive and thus applies to QIP placed in service after September 27, 2017 (December 31, 2017 for the change to the ADS life). Additional analysis on this and other tax-related CARES Act provisions can be found in an earlier alert here.

Rev. Proc. 2020-25 provides procedural options for a taxpayer to capture the retroactive benefit of the law change in the taxpayer’s 2018, 2019, or 2020 tax year, by either amending its tax returns (or filing an amended return or administrative adjustment request for BBA partnerships) or changing accounting methods.

The new automatic accounting method change procedures included in the Rev. Proc. apply to QIP placed in service after December 31, 2017, and are available to taxpayers other than those changing an election under Section 163(j) of the Code. A taxpayer may also make a late election, or revoke an election, out of bonus depreciation through the streamlined process. Additional procedures for filing for an automatic change in accounting methods is provided in Rev. Proc. 2020-23. Taxpayers changing an election under Section 163(j) are not eligible to use the Rev. Proc.’s accounting method change procedures and instead must file amended returns to claim a change in depreciation of QIP (see our alert here).

The various alternatives in the Rev. Proc. provide taxpayers with broad optionality to increase near-term cash-on-hand via tax refunds from prior tax years (potentially enhanced by other retroactive changes provided in the CARES Act, such as net operating loss carrybacks, discussed in a prior alert here). Alternatively, taxpayers with prior or projected future losses may wish to forgo bonus depreciation in lieu of increased future deductions over the 15-year recovery period. A partnership will want to analyze the differing results of the various options for its partners, including potentially withdrawn partners.

For questions about this relief or other tax issues, contact a member of the Ballard Spahr Tax Group.

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