IRS gives a corporate group 60 days to elect out of bonus depreciation

Plain-English summary

A corporate parent and two subsidiaries claimed additional first-year depreciation on five-year property placed in service during two taxable years. Their internal accounting team lacked federal tax expertise and relied on an outside firm to prepare the consolidated returns and advise on tax elections. The firm did not tell them that Section 168(k)(7) allowed an election out of bonus depreciation for the class of property. The deductions produced significant net operating losses and, according to the taxpayer, a financial-reporting position that did not accurately reflect its finances. After the firm stopped serving businesses in the taxpayer's industry, candidates in a search for a replacement firm identified the missed election and its possible financial-reporting benefit. The IRS found the requirements for discretionary relief satisfied and gave the taxpayer 60 days to file amended consolidated returns electing out for the five-year property in both years. The ruling did not decide whether any of the property was actually eligible for bonus depreciation.

Ruling snapshot

• Question: May the corporate group make late elections not to deduct additional first-year depreciation for its five-year property in two taxable years?
• Outcome: approved (60 days to file amended consolidated returns making the elections)
• Key authorities: IRC § 168(k)(1), (6), (7); Treas. Reg. §§ 1.168(k)-2(f), 301.9100-1, 301.9100-3

Full text (IRS public release)

Internal Revenue Service                                      Department of the Treasury
                                                              Washington, DC 20224

Number: 202448005                                             Third Party Communication: None
Release Date: 11/29/2024                                      Date of Communication: Not Applicable
Index Number: 9100.04-00
                                                              Person To Contact:
                                                              -----------------------, ID No. -----------------
--------------------------                                    Telephone Number:
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----------------------                                        Refer Reply To:
-------------------------------------                         CC:ITA:B07
----------------------------------                            PLR-104573-24
                                                              Date:
                                                              August 29, 2024




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

LEGEND:

P                   =     ------------------------------------------------
S1                  =     -----------------------------------------------------------
S2                  =     ----------------------------------------------
Year1               =     --------------------------------------------------------
Year2               =     --------------------------------------------------------
Date1               =     ------------------
Date2               =     ---------------
Date3               =     ----------------------
Firm                =     --------------------
X                   =     --------------------

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

       This letter ruling refers to a letter dated March 8, 2024, and subsequent
correspondence, submitted on behalf of P, S1, and S2, by their authorized
representative, requesting an extension of time to make the election not to deduct
additional first year depreciation under § 168(k) of the Internal Revenue Code (Code)
for certain qualified property placed in service during the Year1 and Year2 taxable
years. This request is made pursuant to §§ 301.9100-1 and 301.9100-3 of the
Procedure and Administration Regulations. Hereinafter, P, S1, and S2 are collectively

PLR-104573-24                                2

referred to as “Taxpayer”. This letter ruling is being issued electronically as permissible
under section 7.02(5) of Rev. Proc. 2024-1, 2024-1 I.R.B. 1, 34.

      Unless provided otherwise, all references in this letter ruling to § 168(k) are
treated as a reference to § 168(k) as in effect after amendment by the Tax Cuts and
Jobs Act, Pub. L. 115-97, 131 Stat. 2054 (December 22, 2017). Further, all references
to § 1.168(k)-2 of the Income Tax Regulations are treated as a reference to the final
regulations under § 1.168(k)-2 published in the Federal Register on November 10, 2020
(85 FR 71734).

                                         FACTS

      P represents that the facts are as follows:

     P is the common parent of an affiliated group that includes S1 and S2. P files a
consolidated federal income tax return on a Form 1120, U.S. Corporation Income Tax
Return, on a fiscal year basis. Taxpayer’s overall method of accounting is an accrual
method. Taxpayer is subject to the Financial Accounting Standards Board’s Accounting
Standards Codification.

     During the Year1 and Year2 taxable years, Taxpayer placed in service 5-year
property that is qualified property under § 168(k)(1).

      On Date1, Taxpayer engaged Firm to prepare its consolidated federal income tax
returns for the Year1 and Year2 taxable years (collectively, the “Tax Returns”) and other
income tax returns. Firm has assisted Taxpayer with its return preparation since Date2.

     Taxpayer has an internal accounting team that does not have expertise in federal
income taxes. Taxpayer relied on Firm’s expertise to prepare the Tax Returns and
advise Taxpayer on advantageous tax elections.

       Firm prepared the Tax Returns and provided them to Taxpayer for review. Firm
discussed the Tax Returns with Taxpayer and its internal accounting team. During its
preparation of the Tax Returns, and its discussion of the Tax Returns with Taxpayer and
its internal accounting team, Firm did not advise Taxpayer of the option to elect out of
additional first year depreciation under § 168(k)(7) for qualified property placed in
service during Year1 or Year2. Taxpayer was not aware of the § 168(k)(7) election not
to claim the additional first year depreciation for a class of qualified property.

       Taxpayer timely filed the Tax Returns, prior to the respective extended due
dates. On the Tax Returns, Taxpayer represents that it deducted the additional first
year depreciation for the 5-year property that is qualified property under § 168(k)(1) and
placed in service during the Year1 or Year2 taxable years. Taxpayer represents that
the additional first year depreciation deducted for the 5-year qualified property resulted
in a significant net operating loss (NOL) in the Year1 and Year2 taxable years, and as a

PLR-104573-24                                  3

result, Taxpayer reported a financial position that Taxpayer represents does not
accurately reflect its financial position.
        On Date3, Firm notified Taxpayer that Firm was no longer providing tax return
preparation services for taxpayers engaged in the trade or business of X. Taxpayer
sought to engage a new firm to prepare its tax returns through a request for proposal
(RFP). Through the RFP process, Taxpayer learned from respondents to the RFP that
Taxpayer had the option to elect out of additional first year depreciation under
§ 168(k)(7) for its 5-year property that is qualified property placed in service in the Year1
and Year2 taxable years, and that making such election would have permitted Taxpayer
to avoid negative implications for its financial reporting.

                                   RULING REQUESTED

       Accordingly, Taxpayer requests an extension of time pursuant to §§ 301.9100-1
and 301.9100-3 to make an election under § 168(k)(7) not to deduct the additional first
year depreciation under § 168(k)(1) with respect to its 5-year class of property that is
qualified property and placed in service by Taxpayer during the Year1 and Year2
taxable years.

                                            LAW

      Section 168(k)(1) allows, for the taxable year in which qualified property is placed
in service, an additional first year depreciation deduction equal to the applicable
percentage of the adjusted basis of that qualified property.

       Section 168(k)(6) provides that, in general, the applicable percentage for
qualified property placed in service by the taxpayer after September 27, 2017, and
before January 1, 2023 (before January 1, 2024, for qualified property described in
§ 168(k)(2)(B) and (C)), is 100 percent.

       Section 168(k)(7) provides that a taxpayer may elect not to deduct additional first
year depreciation for any class of property placed in service during the taxable year.
Section 1.168(k)-2(f)(1)(i) provides that if this election is made, the election applies to all
qualified property that is in the same class of property and placed in service in the same
taxable year, and no additional first year depreciation deduction is allowable for the
property placed in service during the taxable year in the class of property. The term
"class of property" is defined in § 1.168(k)-2(f)(1)(ii) as meaning, among other things,
each class of property described in § 168(e) (for example, 5-year property).

       Section 1.168(k)-2(f)(1)(iii)(A) 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 qualified property is placed in service
by the taxpayer.

PLR-104573-24                                 4

       Section 1.168(k)-2(f)(1)(iii)(B) 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 Year1 and Year2 taxable years provide 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 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.

      Sections 301.9100-1 through 301.9100-3 provide the standards the
Commissioner of Internal Revenue will use to determine whether to grant an extension
of time to make a regulatory election. Under § 301.9100-1(a), the Commissioner 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.

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

      Section 301.9100-1(b) defines a regulatory election as an election whose due
date is prescribed by regulations published in the Federal Register, a revenue ruling,
revenue procedure, notice, or announcement published in the Internal Revenue Bulletin.

       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,
Taxpayer is granted an extension of 60 calendar days from the date of this letter ruling
to make the election not to deduct the additional first year depreciation under § 168(k)
for the 5-year class of property placed in service by Taxpayer during the Year1 and
Year2 taxable years.

      This election must be made by Taxpayer filing an amended consolidated federal
income tax return for each of the Year1 and Year2 taxable years, with a statement
indicating that Taxpayer is electing not to deduct the additional first year depreciation for
the 5-year property placed in service by Taxpayer during the taxable year.

      Except as specifically set forth above, no opinion is expressed or implied
concerning the federal 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

PLR-104573-24                                  5

Taxpayer during the Year1 or Year2 taxable years is eligible for the additional first year
depreciation deduction under § 168(k).

     The ruling contained in this letter is based upon information and representations
submitted by Taxpayer 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 ruling, it is subject to verification on examination.

       A copy of this letter ruling must be attached to any federal income tax return to
which it is relevant. Alternatively, a taxpayer filing its federal return electronically may
satisfy this requirement by attaching a statement to their return that provides the date
and control number of the letter ruling.

     This letter ruling is directed only to the taxpayer requesting it. Section 6110(k)(3)
provides that this ruling may not be used or cited as precedent.

     In accordance with the power of attorney on file with this office, we are sending a
copy of this letter ruling to Taxpayer’s authorized representatives. We are also sending
a copy of this letter ruling to the appropriate operating division director.

                                          Sincerely,

                                          Elizabeth R. Binder

                                          ELIZABETH R. BINDER
                                          Senior Counsel, Branch 7
                                          Office of the Associate Chief Counsel
                                          (Income Tax & Accounting)


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

PLR-104573-24                                           6

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