IRS Enhances Manufacturers’ Ability to Depreciate Capital Expenditures

The Tax Cuts and Job Act (TCJA) aimed to enhance the depreciation expense to entice manufacturers to bring production back to the US. To help accomplish this goal the bonus depreciation deduction was increased from 50% to 100%. However, with that came some compliance requirements in regards to making certain elections for fiscal year filers.

The IRS has issued guidance that allows taxpayers to make a late bonus depreciation election, or to revoke an election, for certain property acquired after 9/27/17 and placed in service during the tax year that includes 9/28/17. Under the TCJA, taxpayers can (1) elect out of 100% bonus depreciation or (2) elect to take 50% bonus depreciation (instead of 100%) for qualified property acquired after 9/27/17 and placed in service during the tax year that includes 9/28/17. Taxpayers that failed to make these elections for the tax year that includes 9/28/17 can make late elections by filing an amended return or a Form 3115 Application for Change in Accounting Method for a limited period of time. If elections were made, taxpayers can revoke the elections by filing an amended return or a Form 3115 Application for Change in Accounting Method for a limited period of time.

The release of this Revenue Procedure hints that final regulations on bonus depreciation will be released soon. While the exact contents of the regulations are not certain, they are not likely to include a fix for the 15 year Qualified Improvement Property issue. Congress intended to allow taxpayers to depreciate Qualified Improvement Property over 15 years and make them eligible for bonus depreciation, however errors in drafting of the TCJA caused this objective to be missed. As a result, Qualified Improvement Property, which includes leasehold improvements, are depreciable over 39 years and are not eligible for 100% bonus depreciation. A corrections bill is generally agreed to be the only method to fix this error.

Please fill out the form below to speak to a Withum team member to discuss compliance requirements as well as any questions you may have regarding the impacts of TCJA on depreciation.