Wednesday, September 18, 2019

New Final and Proposed TCJA 100% Bonus Depreciation Regs Effective Dates

Today, the Federal Register's Public Inspection desk published advance copies of Treasury Decision 9874 and REG-106808-19, final bonus depreciation regulations and new, proposed bonus depreciation regulations, respectively. These regulation packages are scheduled to be published in the Federal Register on September 24, 2019.

Final Regulations Effective Date

The final regulations will be effective when published in the Federal Register, which is scheduled to be on September 24, 2019.

Proposed Regulations Reliance Date

The proposed regulations provide that taxpayers may rely on them prior to the eventual publication of final regulations in the Federal Register. If a taxpayer chooses to rely on these proposed regulations, they must rely on these proposed regulations in their entirety, i.e. there is no picking and choosing provisions upon which to rely. The different provisions in the proposed regulations have slightly different effective dates for reliance.

  • The General Rule. Taxpayers may rely on these regulations for qualified property acquired and placed in service or planted or grafted after September 27, 2017 for taxable years ending on or after September 28, 2017.
  • The Rule for Components. If a taxpayer constructs a larger, self-constructed property and the manufacture, construction, or production began before September 28, 2017, taxpayers may rely on these proposed regulations for components that are qualified property acquired or self-constructed after September 27, 2017 in taxable years ending on or after September 28, 2017.

Impact of the Effective Dates

Because these regulation packages will be published in between the 9/16 and 10/15 deadlines, tax practitioners may need to discuss the disparate impact of these regulations on pass-through entities and C corporations/individuals. For example, consider an individual taxpayer that treated all floor plan financing interest as taken into account and the taxpayer owns both C- and S-corp auto dealerships. The entity returns have or will be filed at the extended filing deadlines. In this situation, the S-corp returns may have different filing positions for 2018 due to the unavailability of these new proposed regulations at the 9/16 filing deadline! How can this be fixed?

For some issues, such as claiming bonus depreciation for auto dealerships above the interest cap by permanently forgoing interest deductions, taxpayers may need to amend their previously filed 2018 tax returns. For other areas, taxpayers may be able to amend their 2018 tax returns or file a Form 3115, Application for Change in Accounting Method under the previously issued Rev. Proc. 2019-33 to make certain late elections or revoke certain elections under the TCJA bonus depreciation rules. In many other areas, taxpayers may be able to file a Form 3115 under the one-year rule of section 6.01 of Rev. Proc. 2018-31 with their 2019 tax returns to comply with these regulations. This would apply to the example in the previous paragraph. Alternatively, the taxpayer could amend their 2018 return prior to filing their 2019 return.

If you need assistance with these issues, please feel free to reach out to me. My contact information can be found here.

Monday, September 10, 2018

Rev. Proc. 2018-40

On August 20th, 2018, the Service published Rev. Proc. 2018-40 in the Internal Revenue Bulletin. This revenue procedure modifies Rev. Proc. 2018-31 to include the new small taxpayer accounting method changes from the TCJA. These changes affect non-tax shelter taxpayerswith less than $25 million in average, annual gross receipts over the prior three years, (determined at the single employer level).  Generally, non-tax shelter taxpayers with less than $25 million in average, annual gross receipts are permitted to use the cash method, avoid UNICAP, avoid the PCM, and either treat inventory as non-incidental materials & supplies or follow their book inventory method. It is important to note that the aggregation rules of section 448(c) apply notwithstanding the language in the revenue procedure that appears to apply the test at the taxpayer level.

Monday, February 19, 2018

The TCJA and Contribution in Aid of Construction

Section 13312 of the Tax Cuts and Jobs Act substantially overhauled section 118 of the Internal Revenue Code. This relatively unpopular Code section fulfills a somewhat unique role. It allows corporations to exclude certain payments from gross income. These payments reduce the taxpayer's basis in the assets to which the payments relate. (For a more in-depth discussion of section 118, the underlying proposed regulations issued in 2000, found here, provide a very good overview.) Over the last decade, the Service has often been involved in contentious disputes over section 118's scope. These controversies usually focus on  a specific class of nonshareholder contributions to capital, contributions in aid of construction, and whether the case law permits non-corporate taxpayers to use an approach like section 118.

In overhauling section 118, Congress provided that contributions in aid of construction as a (potential) customer or any contribution by a governmental entity or civic group (other than as a shareholder) would no longer qualify as non-shareholder contributions to capital. In the legislative history, the Conference Committee went on to explain that it intends for the provision to continue apply only to corporations. The act is generally effective for contributions made after December 22, 2017, with some exceptions for Master Development Plans approved by governmental entities prior to that date. Why does this matter?

For many years, taxpayers have been applying this nonshareholder contribution to capital approach to non-corporate entities' contributions in aid of construction. They exclude the contribution from income and reduce the basis of the related assets. Word on the street has been that, as of last year, only one of the Big 4 firms would even write opinions blessing this approach. Gven the much lower income tax rates going forward and the 2.5% asset limitation for under section 199A, it might be advisable for passthrough entities who have taken this approach to file Form 3115, Application for Change in Accounting Method to reduce their IRS audit risk.

If you have passthrough entity clients who have received substantial payments from government entities to pay for construction and the payments were excluded from gross income and the bases of the related assets reduced by the amount of the payments, please feel free to contact me about making this method change.

Friday, December 15, 2017

Continued Live blog of the bill's tax accounting provisions

1. Qualified Leasehold Improvement Property, Qualified Retail Property, and Qualified Restaurant Property are axed in favor of Qualified Improvement Property starting in 2018.

2. Electing Real Property Trades or Businesses form a new class mandatory ADS property starting in 2018.

3. Research and experimentation expenses now must be amortized over five years, unless they are for specified foreign research, in which case the period rises to fifteen years. This starts in 2022.

4. The development of new software is now defined as an R&E expense. This also starts in 2022.

5. The accrual method has been modified so that income cannot be delayed any later than when it is included for financial income reporting purposes. Rev Proc 2004-34 has been made into a statute. These rules apply starting in 2018.

6. Interest is now limited to the business interest income plus 30% of the adjusted taxable income of the taxpayer plus the floor plan finance interest of the taxpayer. Small taxpayers that meet the $25 million test are exempt from this limit.

7. The Section 199 DPAD is repealed.

Overview of the Tax Cuts and Jobs Act Conference Report's Tax Accounting Provisions

If you don't have it already, you can find the bill here.

1. Section 179. Following the Senate version, the Section 179 expensing dollar limitation increases to $1 million and the phaseout (reduction in limitation) increases to $2.5 million. In a new development, the MACRS' Qualified Improvement Property is now Qualified Real Property for section 179 purposes. So are roofs, HVAC, fire protection and alarm systems, and security systems if they are subsequent improvements to nonresidential real estate. In another new development, the section 179 exclusion for property used in lodging has been repealed. This means that section 179 will not be available for section 1245 property used in residential rental property. These provisions are effective for tax years beginning after 12/31/2017. 

2. Increased Cash Method Availability and Related Rules. The conference report follows the House version of the bill and increases the availability of the cash method of accounting to taxpayers with $25 million or less in average annual gross receipts. This provision is now adjusted for inflation. Section 263A "UNICAP" no longer applies to taxpayers that meet the $25 million test. Similarly, section 471 is modified so that the Service may no longer force taxpayers to use inventories (and the accrual method of accounting) if they meet the $25 million test. Taxpayers who meet the $25 million test will also be allowed to treat inventory as non-incidental materials and supplies, (similar to how Revenue Procedures 2001-10 and 2002-28 currently work), OR are permitted to use an inventory method that conforms to their financial accounting method or, if they don't have financials, their book method. There will also be a similar exemption from the Percentage Completion Method for taxpayers with long-term contracts. All of these provisions will apply across entity types (including sole proprietorships) and will be available in tax years beginning after 12/31/2017.

3. 100% Expensing. Bonus depreciation goes to 100% in 2018 with a 20% per year drawdown starting in 2023. Bonus depreciation will now be available for used property not previously used by the taxpayer and that was not acquired from certain related parties or the basis of which is not determined with reference to the adjusted basis in the hands of another taxpayer (including the basis step-up of property received from a decedent). Taxpayers involved in real property trades or businesses or who have certain floorplan financing arrangements. The new 100% bonus rules generally apply for property placed-in-service after September 27, 2017 so long as the property was not acquired before September 28, 2017. 

Friday, April 28, 2017

California Announces Revision to Method Change Policy

Yesterday, the California FTB issued FTB Notice 2017-03. In this notice, the FTB announced that it was withdrawing FTB Notice 96-3 and will now follow the federal Rev. Proc. 2016-29. This notice was issued to clear up confusion regarding the application of Notice 96-3.

Overview. In FTB Notice 96-3, the FTB announced that it would not follow IRS Rev Proc 96-31. This revenue procedure allowed taxpayers to obtain automatic consent to change their accounting methods when they claimed less than the depreciation allowable. This procedure was republished with slight modifications in IRS Rev Proc 97-37. In IRS Rev Proc 98-60, the procedure was modified so that taxpayers could obtain automatic consent both when they claimed less than the depreciation allowable and when they claimed more. (With slight modifications, this procedure can now be found in section 6.01 of IRS Rev. Proc. 2017-30, which is the quite recent replacement of Rev. Proc. 2016-29.)  In FTB Notice 2000-8, the FTB announced their general policy under which taxpayers could obtain consent to change their accounting methods for California tax purposes. This notice was generally understood as permitting Federal method changes for California tax purposes under California's "deemed election" provisions of Revenue and Taxation Code sections 17024.5 and 23051.5 when there was no conflict between California and Federal tax laws, which was generally the case for non-C corp taxpayers seeking depreciation method changes.

In discussing the new notice with its author, I have learned that the FTB always took the position that Notice 96-3 applied only to Rev. Proc. 96-31 and did not apply to Rev. Proc. 97-37 and its successors. Therefore, the general understanding of Notice 2000-8 was the correct interpretation.

Practice Tips

1. The federal automatic consent change procedures are strict compliance procedures. See Hawse v. Comm'r, T.C. Memo 2015-99, at 22. Even though the IRS may not have rejected an automatic consent Form 3115, the taxpayer may not have received IRS consent to make the change. Id. at 24. Since California's deemed election rules require a "proper election filed with the Internal Revenue Service in accordance with the Internal Revenue Code or regulations", automatic consent Forms 3115 that comply with some, but not all, of the requirements of the automatic change procedures are vulnerable to FTB examination changes.

This is relevant to this topic because many depreciation method changes arise from cost segregation studies. In my experience, most practitioners omit some of the required statements for certain depreciation method changes. When filing a Form 3115 to implement a cost segregation study, practitioners most often omit the statement required under section 6.01(3)(b)(vii) of Rev. Proc. 2017-30 (and predecessors). (This section requires a statement of the facts and law supporting the new classification of each section 1245 asset.)

2. Taxpayers may continue to rely on FTB Notice 2000-8 to request different accounting methods for California purposes than the ones they elect for Federal purposes.

Thursday, May 5, 2016

New List of Automatic Changes

Since the Service severed the list of automatic changes from the procedural rules for automatic method changes, they are now free to more frequently update that list. Today that happened with the release of an advance copy of Revenue Procedure 16-29 (and just in time for the ABA Tax Section's May Meeting.) Practitioners should take care not to rely on this advance copy after the final version is published in the Internal Revenue Bulletin. After May 23rd, when googling Rev. Proc. 16-29, always remember to append "IRB" to the search.

Quick notes:

  1. Effective Date. The new rev proc is generally effective for Forms 3115 filed on or after May 5, 2016. 
  2. Transition Relief. Taxpayers with pending nonautomatic Forms 3115 filed before May 5, 2016 where the change now qualifies as automatic have until June 6, 2016 or, if later, the date of the letter granting or denying consent to make the change, to ask their National Office contact to change to the automatic consent procedures. The National Office will then send an acknowledgement letter. The taxpayer will then have until the earlier of 30 days from the date of that letter or date they must file the Covington copy of the Form 3115. For automatic changes that are now nonautomatic, the transition relief varies depending on the change.
  3. Significant changes.
    • Lots of housekeeping to remove defunct TPR provisions.
    • Changes to comply with section 267(a)(3) now are exempt from the five-year item and five-year overall method eligibility rules.
    • Changes to the PCM under section 1.460-4(b) are now nonautomatic.
    • Changes from all impermissible inventory valuation and identification methods under section 471 are now automatic. 
    • Certain depreciation-related method changes are now scoped out if the taxpayer claimed a tax credit on the item's cost.
    • New changes related to the Retail Inventory Method, section 195 start-up costs, and UNICAP interest capitalization.
    • An extension of the five-year item eligibility waiver for certain changes, mostly TPR-related.