Pass-through entities could make a late bonus depreciation opt-out

Plain-English summary

An individual wholly owned several pass-through entities that claimed additional first-year depreciation on qualified property. Those deductions flowed through to the owner, contributed to a net loss, and prevented part of an alimony deduction from producing a usable net operating loss. Neither the entities' in-house tax staff nor the owner's return preparer had advised that the entities could elect out of bonus depreciation. The IRS found that the standards for late-election relief were met. It gave the entities 60 days to amend their partnership or S corporation returns and elect out for all classes of qualified property placed in service during the relevant year.

Ruling snapshot

• Question: Could the affiliated entities make a late election not to claim additional first-year depreciation?
• Outcome: Approved, with 60 days to file amended returns and election statements.
• Key authorities: IRC § 168(k)(2)(D)(iii); Treas. Reg. §§ 1.168(k)-1(e)(3), 301.9100-1, and 301.9100-3.

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201818002 Third Party Communication: None
Release Date: 5/4/2018 Date of Communication: Not Applicable
Index Number: 9100.04-00
Person To Contact:
------------------------------------------------------------ --------------------------------, ID No. ----------
------ ------------------
---------------------------------------------- Telephone Number:
---------------------------- ----------------------
---------------------------- Refer Reply To:
CC:ITA:B07
PLR-124256-17
Date:
February 01, 2018

Re: Request for Extension of Time to Make the Election Not to Deduct the Additional
First Year Depreciation

Legend

Taxpayer = ----------------------

P1 = --------------------------------------------------------------------------

P2 = -----------------------------------------------------

P3 = -------------------------------------------------

P4 = ---------------------------------------------------

P5 = --------------------------------------------------------------

Date 1 = ----------------------------

Date 2 = ------------------------

Date 3 = ----------------------------

A = -------

B = ---------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------.

C = --------------
PLR-124256-17 2

D = ------------------------------------------

E = ----------------------

F = -----------------------

Dear ---------------:

    This letter responds to a letter dated August 4, 2017, and subsequent

correspondence, submitted by Taxpayer on behalf of his wholly owned pass-through
entities P1, P2, P3, P4, and P5 (hereinafter collectively referred to as “the affiliated
entities”), requesting an extension of time pursuant to § 301.9100-3 of the Procedure
and Administration Regulations to make the election not to deduct the additional first
year depreciation under § 168(k) of the Internal Revenue Code for all classes of
qualified property placed in service by the affiliated entities during the taxable year
ended Date 1 (the A taxable year).

    All references in this letter ruling to § 168(k) are treated as a reference to

§ 168(k) as in effect prior to amendment by § 143(b) of the Protecting Americans from
Tax Hikes Act of 2015 (PATH Act), enacted as part of the Consolidated Appropriations
Act, 2016, Division Q, Pub. L. 114-113, 129 Stat. 2242 (December 18, 2015), for
qualified property acquired by the affiliated entities after 2007 and placed in service by
the affiliated entities before 2016.

FACTS

    Taxpayer represents that the facts are as follows:

   Taxpayer is an individual who files Form 1040, U.S. Individual Income Tax Return,

on a calendar year basis. Taxpayer wholly owns the affiliated entities. The affiliated
entities each file either a Form 1065, U.S. Income Tax Return for a Partnership or Form
1120S, U.S. Income Tax Return for an S Corporation, as applicable, on a calendar year
basis and use an accrual method of accounting. The affiliated entities are in the trade
or business of B. The period of limitation on assessment under § 6501(a) for the A
taxable year has not expired as of the date of this letter.

  The affiliated entities depreciated all property placed in service in A using MACRS

depreciation methods, recovery periods, and conventions in accordance with § 168 and
Rev. Proc. 87-56, 1987-2 C.B. 674. The affiliated entities claimed additional first year
depreciation on all classes of qualified property placed in service in A in accordance
with § 168(k). The affiliated entities reported income to their shareholder/partner,
Taxpayer, on Schedule K-1, (Form 1120S/1065) Shareholder’s/Partner’s Share of
PLR-124256-17 3

Income, Deductions, Credits, etc., taking into account the aforementioned depreciation
deductions. Taxpayer claimed the depreciation deductions on his A Form 1040.

  Taxpayer paid $C of alimony during A and deducted the alimony payments on his

A Form 1040. Taxpayer reported a net loss on the return and was precluded from
carrying back or carrying over the net loss as a net operating loss (NOL) to the extent
the net loss was attributable to the alimony deduction under § 172(d)(4) and § 1.172-
3(a)(3) of the Income Tax Regulations (allowing nonbusiness deductions in the
computation of NOLs only to the extent of nonbusiness income for taxpayers other than
corporations).

  Taxpayer could have preserved the benefit of the deduction for alimony on his A

return if the affiliated entities had minimized the depreciation deductions flowing through
to Taxpayer and eliminated his net loss. Specifically, the affiliated entities could have
elected not to claim additional first year depreciation on all classes of eligible property
placed in service in A under § 168(k).

   The Forms 1065 and Forms 1120S of the affiliated entities are prepared in-house

by employees of the affiliated entities. The CFO of the affiliated entities is responsible
for the preparation of the returns, and the affiliated entities employ a full time staff,
including one or more Certified Public Accountants (“CPAs”), to prepare the federal
income tax returns and ensure compliance with all tax rules. Taxpayer generally
engages a third party tax professional to prepare his Form 1040. Taxpayer engaged D
to prepare his A Form 1040.

   Taxpayer was not advised by the affiliated entities’ in-house tax preparers or D,

and Taxpayer did not know independently, that Taxpayer could preserve the benefit of
the deduction for alimony on the A return by having the affiliated entities make the
election not to deduct the additional first year depreciation for all classes of qualified
property placed in service by the affiliated entities during the A taxable year.

 Taxpayer’s A Form 1040 was timely filed on Date 2, and the affiliated entities’

Forms 1065 and Form 1120S were timely filed prior to Date 3.

   Taxpayer discovered the failure to make the election out of additional first year

depreciation in E after consulting with D about his A Form 1040. Taxpayer consulted
with F regarding potential remedies for the failure to make the election out of additional
first year depreciation, and F advised Taxpayer to file this request for relief under Treas.
Reg. § 301.9100-3.

RULING REQUESTED

  Taxpayer requests an extension of time pursuant to §§ 301.9100-1 and

301.9100-3 to make the election under § 168(k)(2)(D)(iii), not to deduct the additional
PLR-124256-17 4

first year depreciation under § 168(k) for all classes of qualified property placed in
service in the taxable year ended Date 1.

LAW AND ANALYSIS

   Section 168(k)(1) allowed, in the taxable year that qualified property is placed in

service, a 50-percent additional first year depreciation deduction for qualified property (i)
acquired by a taxpayer after December 31, 2007, and before September 9, 2010, or
after December 31, 2011 (or December 31, 2012, for qualified property described in
§§ 168(k)(2)(B) or 168(k)(2)(C)) and before January 1, 2016, and (ii) placed in service
by the taxpayer before September 9, 2010, or after December 31, 2011 (or December
31, 2012, for qualified property described in §§ 168(k)(2)(B) or 168(k)(2)(C)) and before
January 1, 2016 (or January 1, 2017, for qualified property described in §§ 168(k)(2)(B)
or 168(k)(2)(C)).

   Section 168(k)(2)(D)(iii) provided that a taxpayer may elect not to deduct

additional first year depreciation for any class of property placed in service by the
taxpayer during the taxable year. The term “class of property” is defined in § 1.168(k)–
1(e)(2)(i) to mean, in general, each class of property described in § 168(e) (for example,
5-year property). See section 5.01 of Rev. Proc. 2008-54, 2008-2 C.B. 722, and section
3.01 of Rev. Proc. 2011-26, 2011-16 I.R.B. 664 (rules similar to the rules in § 1.168(k)-1
for “qualified property” or for “30-percent additional first year depreciation deduction”
apply for purposes of § 168(k) as currently in effect).

   Section 1.168(k)-1(e)(3)(i) provides that the election not to deduct additional first

year depreciation must be made by the due date (including extensions) of the federal
tax return for the taxable year in which the property is placed in service by the taxpayer.

   Section 1.168(k)-1(e)(3)(ii) provides that the election not to deduct additional first

year depreciation must be made in the manner prescribed on Form 4562, “Depreciation
and Amortization,” and its instructions. The instructions to Form 4562 for the A taxable
year provided that the election not to deduct the additional first year depreciation is
made by attaching a statement to the taxpayer's timely filed tax return (including
extensions) indicating that the taxpayer is electing not to deduct the additional first year
depreciation and the class of property for which the taxpayer is making the election.

   Under § 301.9100-1, the Commissioner of Internal Revenue has discretion to

grant a reasonable extension of time under the rules set forth in §§ 301.9100-2 and
301.9100-3 to make a regulatory election.

   Sections 301.9100-1 through 301.9100-3 provide the standards the

Commissioner will use to determine whether to grant an extension of time to make an
election. Section 301.9100-2 provides automatic extensions of time for making certain
PLR-124256-17 5

elections. Section 301.9100-3 provides extensions of time for making elections that do
not meet the requirements of § 301.9100-2.

    Section 301.9100-3(a) provides that requests for relief under § 301.9100-3 will be

granted when the taxpayer provides evidence to establish to the satisfaction of the
Commissioner that the taxpayer acted reasonably and in good faith, and the grant of
relief will not prejudice the interests of the government.

CONCLUSION

     Based solely on the facts and representations submitted, we conclude that the

requirements of §§ 301.9100-1 and 301.9100-3 have been satisfied. Accordingly, the
affiliated entities are granted 60 calendar days from the date of this letter to make the
election not to deduct the additional first year depreciation under § 168(k) for all classes
of property placed in service by the affiliated entities during the A taxable year that
qualify for the additional first year depreciation deduction. This election must be made
by the affiliated entities filing either an amended Form 1065, U.S. Income Tax Return for
a Partnership or Form 1120S, U.S. Income Tax Return for an S Corporation, as
applicable, for the A taxable year, with a statement indicating that the affiliated entities
are electing not to deduct the additional first year depreciation for all classes of qualified
property placed in service during that taxable year.

    Except as specifically set forth above, we express no opinion concerning the

federal income tax consequences of the facts described above under any other
provisions of the Code (including other subsections of §168). Specifically, no opinion is
expressed or implied on whether any item of depreciable property placed in service by
the affiliated entities during the A taxable year is eligible for the additional first year
depreciation deduction.

    The rulings contained in this letter are based upon information and

representations submitted by the affiliated entities and accompanied by a penalty of
perjury statement executed by an appropriate party. While this office has not verified
any of the material submitted in support of the request for rulings, it is subject to
verification on examination.
PLR-124256-17 6

  This letter ruling is directed only to the taxpayer requesting it. Section 6110(k)(3)

provides that it may not be used or cited as precedent.

    In accordance with the power of attorney, we are sending a copy of this letter

ruling to the affiliated entities' authorized representative. We also are sending a copy of
this letter ruling to the appropriate operating division director.

                                             Sincerely yours,

                                             DEENA DEVEREUX

                                             DEENA DEVEREUX
                                             Senior Technician Reviewer, Branch 7
                                             Office of Associate Chief Counsel
                                             (Income Tax & Accounting)

Enclosures (2):
copy of this letter
copy for section 6110 purposes