The retail glitch fix – How to take advantage of retroactive relief

Restaurants, grocery stores, retail stores, and similar businesses were disparately impacted by the TCJA error, which excluded QIP from bonus depreciation and saddled it with a 39-year recovery period. Taxpayers and tax practitioners initially celebrated the much-anticipated retail glitch fix upon passage of the CARES Act, however, excitement quickly diminished, as it became clear the ‘fix’ was riddled with uncertainty. Questions mounted surrounding the practicality of taking advantage of retroactive relief, and taxpayers were left in limbo awaiting guidance from the IRS.

On April 17, 2020, the IRS published Revenue Procedure (“Rev. Proc.”) 2020-25, providing options to various taxpayers wanting to take advantage of the relief afforded to QIP in the CARES Act.

Claiming Accelerated Depreciation in Prior Years

The retail glitch fix affords taxpayers with a 15-year depreciable life for QIP and enables them to take bonus depreciation on eligible QIP put into service in 2018, 2019, or 2020. Taxpayers can get this retroactive relief in one of two ways: 1. By filing an amended return or Administrative Adjustment Request (“AAR”); or 2. By requesting an accounting method change using Form 3115.

1. Amended Return or AAR

Pursuant to Rev. Proc. 2020-25, taxpayers, excluding partnerships, can file amended returns for tax years 2018, 2019, or 2020, to apply the QIP changes afforded by the CARES Act. Amended returns filed under Rev. Proc. 2020-25 must be filed on or before October 15, 2021. Partnerships subject to the Bipartisan Budget Act (“BBA”), on the other hand, are provided relief in Rev. Proc. 2020-23, which affords the option to file amended returns in lieu of filing AARs, for tax periods 2018 or 2019. These partnerships amended returns must be filed prior to September 30, 2020.

2. Accounting Method Change

Alternatively, taxpayers can file a Form 3115 attached to their current year income tax return, which provides the previously missed QIP deduction through a Section 481(a) adjustment, to request an automatic accounting method change with respect to QIP assets. Rev. Proc. 2020-25 also references QIP placed in service one year before the year of change and provides a work-around from the general two-year consistency rule, affording first-year property the same treatment as property meeting the two-year requirement.

Mazars Insight

There are advantages and disadvantages to filing an amended return/AAR, as well as, advantages and disadvantages to requesting an accounting method change; the various implications are extremely situation specific.

For instance, a taxpayer filing an amended return for the 2018 tax period will obtain the benefit of bonus depreciation and a 15-year recovery period with respect to the year the amended return relates, i.e., 2018.

In comparison, if a taxpayer requests an accounting method change in the 2019 tax period, with their timely filed 2019 return, the bonus depreciation and additional benefits will be taken into account in 2019, or the year the Form 3115 is filed.

Based on a taxpayer’s prior cash flow, business needs, etc., it may make sense to take advantage of the retroactive benefits in 2018 by filing an amended return. On the other hand, it may make sense to request an accounting method change if current-year cash flow is not an issue. This example poses a few general considerations among the myriad items that should be taken into account when determining whether to file an amended return or request an accounting method change.

Additionally, there are specific instructions for filing the Form 3115, and instructions on how to treat any resulting method change.

State taxes should also be considered when analyzing the impact of filing amended returns or requesting accounting method changes. Not all states adopt bonus depreciation and some may not adopt the entirety of CARES Act relief.

Procedural Guidance for Retroactive Elections

Pursuant to Rev. Proc. 2020-25, taxpayers can also retroactively make late elections under IRC Sections 168(g)(7) (i.e., election to use Alternative Depreciation System (“ADS”)), 168(k)(5) (i.e., rules for certain plants bearing fruits and nuts), 168(k)(7) (i.e., electing out of bonus depreciation), or 168(k)(10) (i.e., election to use 50% depreciation), for tax periods 2018, 2019, and 2020.

Taxpayers can use Rev. Proc. 2020-25 to revoke elections under IRC Sections 168(k)(5), 168(k)(7), and 168(k)(10), or to withdraw any election under IRC Section 168(g)(7). These changes can be facilitated by filing an amended return/AAR, or, with the exception of the withdrawal of a Section 168(g)(7) election, by requesting an accounting method change, along with a 481(a) adjustment. To take advantage of this relief, amended returns or AARs must be filed on or before October 15, 2021.

Mazars Insight

The changes in the CARES Act and Revenue Procedure 2020-25 could provide significant relief and cash flow for many businesses impacted by the current environment. In order to fully maximize the changes to the QIP rules, one should consider undertaking a cost segregation study to identify QIP that may have previously been included in another asset class. Mazars USA’s Cost Segregation group specializes in segregating QIP assets and costs in order to maximize the benefits.

Please contact your Mazars USA LLP professional for additional information.

Published on April 23, 2020

The information provided here is for general guidance only, and does not constitute the provision of tax advice, accounting services, investment advice, legal advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal or other competent advisers.