IRS Reminds Taxpayers to FIle Tax Returns (FS-2023-2) The IRS has reminded taxpayers of their tax responsibilities, including if they’re required to file a tax return. Generally, most U.S. citizens and permanent residents who work in the United St...
AZ - Taxpayers personally liable for company’s unpaid taxes For Arizona sales and use tax purposes, a company’s managing member and his spouse (taxpayers) were properly liable for transaction privilege taxes (TPT) owed by the company with respect to charges ...
CT - Governor discusses childcare credit proposals Connecticut Gov. Ned Lamont held a press conference to discuss his childcare proposals in the state budget, including a corporation business tax credit for employers that:provide assistance to their e...
DE - Hazardous substances cleanup tax rate for 2023 announced Delaware has announced that the hazardous substance cleanup tax rate for 2023 is 0.8389%. The new tax rate goes into effect on January 1, 2023, and applies to the taxable gross receipts from the sale ...
MA - Interest rates unchanged for second quarter of 2023 The interest rates on the underpayment and overpayment of Massachusetts taxes are unchanged for the period April 1, 2023, through June 30, 2023.The rate for overpayments is 6%.The rate for underpaymen...
NJ - Credit for taxes paid to other jurisdictions discussed For New Jersey personal income tax purposes, special payments or rebates issued by Georgia, Massachusetts, South Carolina, and Virginia in 2022 to New Jersey residents are considered refunds of state ...
The IRS has provided details clarifying the federal tax status involving special payments made by 21 states in 2022. Taxpayers in many states will not need to report these payments on their 2022 tax returns.
The IRS has provided details clarifying the federal tax status involving special payments made by 21 states in 2022. Taxpayers in many states will not need to report these payments on their 2022 tax returns.
General welfare and disaster relief payments
If apaymentismadefor the promotion of the general welfare or as a disaster reliefpayment, for example related to the COVID 19 pandemic, it may be excludable from income forfederaltaxpurposes under the General Welfare Doctrine or as a Qualified Disaster ReliefPayment.Paymentsfrom the followingstatesfall in this category and theIRSwill not challenge the treatment of thesepaymentsas excludable forfederalincometaxpurposes in2022:
California,
Colorado,
Connecticut,
Delaware,
Florida,
Hawaii,
Idaho,
Illinois,
Indiana,
Maine,
New Jersey,
New Mexico,
New York,
Oregon,
Pennsylvania, and
Rhode Island.
Alaska is in this group only for the supplemental Energy ReliefPaymentreceived in addition to the annual Permanent Fund Dividend. Illinois and New York issued multiplepaymentsand in each case one of thepaymentswas a refund oftaxesto which the above treatment applies, and one of thepaymentsis in the category of disaster reliefpayment. A list ofpaymentsto which the above treatment applies is available on theIRSwebsite.
Refund of statetaxespaid
If thepaymentis a refund ofstatetaxespaidand recipients either claimed the standard deduction or itemized their deductions but did not receive ataxbenefit (for example, because the $10,000taxdeduction limit applied) thepaymentis not included in income forfederaltaxpurposes.Paymentsfrom the followingstatesin2022fall in this category and will be excluded from income forfederaltaxpurposes unless the recipient received ataxbenefit in the year thetaxeswere deducted.
Georgia,
Massachusetts,
South Carolina, and
Virginia
Other Payments
Otherpaymentsthat may have beenmadebystatesare generally includable in income forfederalincometaxpurposes. This includes the annualpaymentof Alaska’s Permanent Fund Dividend and anypaymentsfromstatesprovided as compensation to workers.
The IRS intends to change how it defines vans, sports utility vehicles (SUVs), pickup trucks and “other vehicles” for purposes of the CodeSec. 30Dnewclean vehicle credit. These changes are reflected in updated IRS Frequently Asked Questions (FAQs) for the new, previously owned and commercial clean vehicle credits.
TheIRSintends tochangehow it defines vans, sports utility vehicles (SUVs), pickup trucks and “other vehicles” for purposes of theCodeSec. 30Dnewclean vehicle credit. Thesechangesare reflected in updatedIRSFrequently Asked Questions (FAQs) for thenew, previously owned and commercialclean vehicle credits.
Clean Vehicle Classification Changes
For a vehicle to qualify for thenewclean vehicle credit, its manufacturer’s suggested retail price (MSRP) cannot exceed:
$80,000 for a van, SUV or pickup truck; or
$55,000 for any other vehicle.
In December, theIRSannounced that proposed regulations woulddefinethese vehicle types by reference to the generaldefinitionsprovided in Environmental Protection Agency (EPA) regulations in 40 CFR 600.002 (Notice2023-1).
However, theIRShas now determined that these vehicles should bedefinedby reference to the fuel economy labeling rules in 40 CFR 600.315-08. Thischangemeans that some vehicles that were formerly classified as “other vehicles” subject to the $55,000 price cap are now classified as SUVs subject to the $80,000 price cap.
Until theIRSreleases proposed regulations for thenewclean vehicle credit, taxpayers may rely on thedefinitionsprovided inNotice2023-1, as modified by today’s guidance. These modifieddefinitionsare reflected in theClean Vehicle Qualified Manufacturer Requirementspage on theIRSwebsite, which lists makes and models that may be eligible for theclean vehicle credits.
Expected Definitions of Vans, SUVs, Pickup Trucks and Other Vehicles
The EPA fuel economy standards establish a large category of nonpassenger vehicles called “light trucks.” Within this category, vehicles aredefinedlargely by their gross vehicle weight ratings (GVWR) as follows:
Vans, including minivans
Pickup trucks, including small pickups with a GVWR below 6,000 pounds, and standard pickups with a GVWR between 6,000 and 8,500 pounds
SUVs, including small SUVs with a GVWR below 6.000 pounds, and standard SUVs with a GVWR between 6,000 and 10,000 pounds
Other vehicles (passenger automobiles) that, based on seating capacity of interior volume, are classified as two-seaters; mini-compact, subcompact, compact, midsize, or large cars; and small, midsize, or large station wagons.
However, the EPA may determine that a particular vehicle is more appropriately placed in a different category. In particular, the EPA may determine that automobiles with GVWR of up to 8,500 pounds and medium-duty passenger vehicles that possess special features are more appropriately classified as “special purpose vehicles.” These special features may include advanced technologies, such as battery electric vehicles, fuel cell vehicles, plug-in hybrid electric vehicles and vehicles equipped with hydrogen internal combustion engines.
Describe the information a seller must provide to the taxpayer and theIRS;
Clarify that the MSRP caps apply to a vehicle placed in service (delivered to the taxpayer) in 2023, even if the taxpayer purchased it in 2022; and
Explain what constitutes a lease.
Effect on Other Documents
Notice2023-1is modified. Taxpayers may rely on thedefinitionsprovided inNotice2023-1, as modified byNotice2023-16, until theIRSreleases proposed regulations for thenewclean vehicle credit.
The IRS established the program to allocate environmental justice solar and wind capacity limitation (Capacity Limitation) to qualified solar and wind facilities eligible for the Low-IncomeCommunitiesBonusCreditProgram component of the energy investment credit.
TheIRSestablished theprogramto allocate environmental justice solar and wind capacity limitation (Capacity Limitation) to qualified solar and wind facilities eligible for theLow-IncomeCommunitiesBonusCreditProgramcomponent of theenergy investment credit. TheIRSalso provided:
initial guidance regarding the overallprogramdesign ,
the application process, and
additional criteria that will be considered in making the allocations.
After the 2023 allocation process begins, the Treasury Department andIRSwill monitor and assess whether to implement any modifications to theLow-IncomeCommunitiesBonusCreditProgramfor calendar year 2024 allocations of Capacity Limitation.
Facility Categories, Capacity Limits, and Application Dates
Theprogramestablishesfour facilities categories and the capacity limitation for each:
(1)
1. Facilities located inlow-incomecommunitieswill have a capacity limitation of 700 megawatts
(2)
2. Facilities located on Indian land will have a capacity limitation of 200 megawatts
(3)
3. Facilities that are part of a qualifiedlow-incomeresidential building project have a capacity limitation of 200 megawatts
(4)
4. Facilities that are part of a qualifiedlow-incomeeconomic benefit project have a capacity limitation of 700 megawatts
TheIRSanticipates applications will be accepted for Category 3 and Category 4 facilities in the third quarter of 2023. Applications for Category 1 and Category 2 facilities will be accepted thereafter. TheIRSwill issue additional guidance regarding the application process and facility eligibility.
Theprogramwill also incorporate additional criteria in determining how to allocate the Capacity Limitation reserved for each facility category among eligible applicants. These may include a focus on facilities that are owned or developed bycommunity-based organizations and mission-driven entities, have an impact on encouraging new market participants, provide substantial benefits tolow-incomecommunitiesand individuals marginalized from economic opportunities, and have a higher degree of commercial readiness.
Finally, only the owner of a facility may apply for an allocation of Capacity Limitation. Facilities placed in service prior to being awarded an allocation of Capacity Limitation are not eligible to receive an allocation. The Department of Energy (DOE) will provide administration services for theLow-IncomeCommunitiesBonusCreditProgram. An allocation of an amount of capacity limitation is not a determination that the facility will qualify for theenergy investment creditor the increase in thecreditunder theLow-IncomeCommunitiesBonusCreditProgram.
The IRS announced a program to allocate $10 billion of credits for qualified investments in eligible qualifying advanced energy projects (the Code Sec. 48C(e) program). At least $4 billion of these credits may be allocated only to projects located in certain energy communities.
The IRS announced aprogramto allocate $10 billion of credits for qualified investments in eligible qualifyingadvanced energy projects(the Code Sec. 48C(e)program). At least $4 billion of these credits may be allocated only to projects located in certain energy communities.
The guidance announcing theprogramalso:
defines key terms, including qualifyingadvanced energy project, specified advanced energy property, eligible property, the placed in service date, industrial facility, manufacturing facilities, and recycling facility;
describes the prevailing wage and apprenticeship requirements, along with remediation options; and
sets forth theprogramtimeline and the steps the taxpayer must follow.
Application and Certification Process
For Round 1 of the Section 48C(e)program, the application period begins on May 31, 2023. The IRS expects to allocate $4 billion in credit in this round, including $1.6 billion to projects in energy communities.
The taxpayer must submit a concept paper detailing the project by July 31, 2023. The taxpayer must also certify under penalties of perjury that it did not claim a credit under several other Code Sections for the same investment.
Within two years after the IRS accepts an allocation application, the taxpayer must submit evidence to the DOE to establish that it has met all requirements necessary to commence construction of the project. DOE then notifies the IRS, and the IRS certifies the project.
Taxpayers generally submit their papers through the Department of Energy (DOE) eXHANGE portal athttps://infrastructure-exchange.energy.gov/. The DOE must recommend and rank the project to the IRS, and have a reasonable expectation of its commercial viability.
Energy Communities and Progress Expenditures
The guidance also provides additional procedures for energy communities and the credit for progress expenditures.
For purposes of the minimum $4 billion allocation for projects in energy communities, the DOE will determine which projects are in energy community census tracts. Additional guidance is expected to provide a mapping tool that applicants for allocations may use to determine if their projects are in energy communities.
Finally, the guidance explains how taxpayers may elect to claim the credit for progress expenditures paid or incurred during the tax year for construction of a qualifyingadvanced energy project. The taxpayer cannot make the election before receiving its certification letter.
The IRS has released newrules and conditions for implementing the real estatedeveloperalternativecost method. This is an optional safe harbor method of accounting for real estatedevelopers to determine when common improvement costs may be included in the basis of individual units of real property in a real property development project held for sale to determine the gain or loss from sales of those units.
The IRS has releasednewrulesandconditionsfor implementing thereal estatedeveloperalternativecost method. This is an optional safe harbor method of accounting forreal estatedevelopersto determine when common improvement costs may be included in the basis of individual units ofreal propertyin areal propertydevelopment project held for sale to determine the gain or loss from sales of those units.
Background
UnderCode Sec. 461,developerscannot add common improvement costs to the basis of benefitted units until the costs are incurred under theCode Sec. 461(h)economic performance requirements. Thus, common improvement costs that have not been incurred underCode Sec. 461(h)when the units are sold cannot be included in the units' basis in determining the gain or loss resulting from the sales.Rev. Proc. 92-29, provided procedures under which the IRS would consent todevelopersincluding the estimated cost of common improvements in the basis of units sold without meeting the economic performance requirements ofCode Sec. 461(h). In order to use thealternativecost method, the taxpayer had to meet certainconditions, provide an estimated completion date, and file an annual statement.
Rev. Proc. 2023-9 Alterative Cost Method
In releasingRev. Proc.2023-9, the IRS and Treasury stated that they recognized certain aspects ofRev. Proc. 92-29are outdated, place additional administrative burdens ondevelopersand the IRS, and that application of the method to contracts accounted for under the long-term contract method ofCode Sec. 460may be unclear.
Thealternativecost methodmust be applied to all projects in a trade or business that meet the definition of a qualifying project. However, thealternativecost limitation of thisrevenue procedureis calculated on a project-by-project basis. Thus, common improvement costs incurred for one qualifying project may not be included in thealternativecost methodcalculations of a separate qualifying project.
Therevenue procedureprovides definitions including definitions of"qualifying project,""reasonable method,"and"CCM contract"(related to the completed contract method). It providesrulesfor application of thealternativecost methodfordevelopersusing the accrual method of accounting and the completed contract method of accounting,rulesfor allocating estimated common improvement costs, and a method for determining thealternativecosts limitation. Therevenue procedurealso provides examples of how itsrulesare applied.
Accounting Method Change Required
UnderRev. Proc.2023-9, thealternativecost methodis a method of accounting. A change to thisalternativecost methodis a change in method of accounting to whichCode Secs. 446(e)and481apply. An eligible taxpayer that wants to change to theRev. Proc.2023-9alternativecost methodor that wants to change from theRev. Proc. 92-29alternativecost method, must use the automatic change procedures inRev. Proc. 2015-13or its successor. In certain cases, taxpayers may use short Form 3115 in lieu of the standard Form 3115 to make the change.
Effective Date
Thisrevenue procedureis effective for tax years beginning after December 31, 2022.
The IRS announced thattaxpayerselectronicallyfilingtheirForm 1040-X, Amended U.S Individual Income Tax Return, will for the first time be able to selectdirectdepositfor any resulting refund. Previously,taxpayershad to wait for a paper check for any refund, a step that added time onto theamended returnprocess. Following IRS system updates,taxpayersfilingamended returnscan now enjoy the same speed and security ofdirectdepositas thosefilingan original Form 1040 tax return.Taxpayersfilingan original tax return using tax preparation software can file an electronicForm 1040-Xif the software manufacturer offers that service. This is the latest step the IRS is taking to improve service this taxfilingseason.
Further, as part of funding for the Inflation Reduction Act, the IRS has hired over 5,000 new telephone assistors and is adding staff to IRSTaxpayerAssistance Centers (TACs). The IRS also plans special service hours at dozens of TACs across the country on four Saturdays between February and May. No matter how ataxpayerfiles theamended return, they can still use the"Where's MyAmended Return?"online tool to check the status.Taxpayersstill have the option to submit a paper version ofForm 1040-Xand receive a paper check.Directdepositis not available onamended returnssubmitted on paper. Current processing time is more than 20 weeks for both paper andelectronicallyfiledamended returns.
"This is a big win fortaxpayersand another achievement as we transform the IRS to improvetaxpayerexperiences,"said IRS Acting Commissioner Doug O’Donnell."This important update will cut refund time and reduce inconvenience for people who fileamended returns. We always encouragedirectdepositwhenever possible. Getting tax refunds intotaxpayers’ hands quickly without worry of a lost or stolen paper check just makes sense."
The OECD/G20 Inclusive Framework released a package of technical and administrative guidance that achieves clarity on the globalminimum tax on multinational corporations known as PillarTwo. Further, it provides critical protections for important tax incentives, including green tax credit incentives established in the Inflation Reduction Act.
The OECD/G20 Inclusive Framework released a package of technical and administrativeguidancethat achieves clarity on theglobalminimum taxon multinational corporations known asPillarTwo. Further, it provides critical protections for important tax incentives, including green tax credit incentives established in the Inflation Reduction Act.PillarTwoprovides for aglobalminimum taxon the earnings of large multinational businesses, leveling the playing field for U.S. businesses and ending the race to the bottom in corporate income tax rates. This package follows the release of the Model Rules in December 2021, Commentary in March 2022 and rules for a transitional safe harbor in December 2022. Theguidancewill be incorporated into a revised version of the Commentary that will replace the prior version.
Additionally, the package includesguidanceon overtwodozen topics, addressing those issues that Inclusive Framework members identified are most pressing. This includes topics relating to the scope of companies that will be subject to theGlobalAnti-Base Erosion (GloBE) Rules and transition rules that will apply in the initial years that theglobalminimum taxapplies. Additionally, it includesguidanceon Qualified Domestic Minimum Top-up Taxes (QDMTTs) that countries may choose to adopt.
"The continued progress in implementing theglobalminimum taxrepresents another step in leveling the playing field for U.S. businesses, while also protecting U.S. workers and middle-class families by ending the race to the bottom in corporate tax rates,"said Assistant Secretary of theTreasuryfor Tax Policy Lily Batchelder."Wewelcomethis agreedguidanceon key technical questions, which will deliver certainty for green energy tax incentives, support coordinated outcomes and provide additional clarity that stakeholders have asked for."
The IRS has released the annual inflation adjustments for 2021 for the income tax rate tables, and for over 50 other tax provisions. The IRS makes these cost-of-living adjustments (COLAs) each year to reflect inflation.
The IRS has released the annual inflation adjustments for 2021 for the income tax rate tables, and for over 50 other tax provisions. The IRS makes these cost-of-living adjustments (COLAs) each year to reflect inflation.
2021 Income Tax Brackets For 2021, the highest income tax bracket of 37 percent applies when taxable income hits:
$628,300 for married individuals filing jointly and surviving spouses,
$523,600 for single individuals and heads of households,
$314,150 for married individuals filing separately, and
$13,050 for estates and trusts.
2021 Standard Deduction The standard deduction for 2021 is:
$25,100 for married individuals filing jointly and surviving spouses,
$18,800 for heads of households, and
$12,550 for single individuals and married individuals filing separately.
The standard deduction for a dependent is limited to the greater of:
$1,100 or
the sum of $350 plus the dependent’s earned income.
Individuals who are blind or at least 65 years old get an additional standard deduction of:
$1,350 for married taxpayers and surviving spouses, or
$1,700 for other taxpayers.
AMT Exemption for 2021 The alternative minimum tax (AMT) exemption for 2021 is:
$114,600 for married individuals filing jointly and surviving spouses,
$73,600 for single individuals and heads of households,
$57,300 for married individuals filing separately, and
$25,700 for estates and trusts.
The exemption amounts begin to phase out when alternative minimum taxable income (AMTI) exceeds:
$1,047,200 for married individuals filing jointly and surviving spouses,
$523,600 for single individuals, heads of households, and married individuals filing separately, and
$85,650 for estates and trusts.
Expensing Section 179 Property in 2021 For tax years beginning in 2021, taxpayers can expense up to $1,050,000 in Code Sec. 179 property. However, this dollar limit is reduced when the Section 179 property placed in service during the year exceeds $2,620,000.
Estate and Gift Tax Adjustments for 2021 The following inflation adjustments apply to federal estate and gift taxes in 2021:
the gift tax exclusion is $15,000 per donee, or $159,000 for gifts to spouses who are not U.S. citizens;
the federal estate tax exclusion is $11,700,000; and
the maximum reduction for real property under the special valuation method is $1,190,000.
2021 Inflation Adjustments for Other Tax Items
The maximum foreign earned income exclusion amount in 2021 is $108,700.
The IRS also provided inflation-adjusted amounts for the:
adoption credit,
lifetime learning credit,
earned income credit,
excludable interest on U.S. savings bonds used for education,
various penalties, and
many other provisions.
Effective Date These inflation adjustments generally apply to tax years beginning in 2021, so they affect most returns that will be filed in 2022. However, some specified figures apply to transactions or events in calendar year 2021.
The IRS has released the 2021 cost-of-living adjustments (COLAs) for pension plan dollar limitations and other retirement-related provisions.
The IRS has released the 2021 cost-of-living adjustments (COLAs) for pension plan dollar limitations and other retirement-related provisions.
Key Unchanged Amounts The 2021 contribution limit remains unchanged at $19,500 for employees who take part in:
401(k) plans,
403(b) plans,
most 457 plans, and
the federal government’s Thrift Savings Plan
The catch-up contribution limit for employees aged 50 and over who participate in these plans also remains unchanged at $6,500.
The limitation for SIMPLE retirement accounts is unchanged at $13,500.
For individual retirement arrangements (IRAs), the limit on annual contributions to an IRA remains unchanged at $6,000. The additional catch-up contribution limit for individuals aged 50 and over is not subject to an annual cost-of-living adjustment, and so remains $1,000.
IRAs and Roth IRAs The income ranges for determining eligibility to make deductible contributions to traditional IRAs and to contribute to Roth IRAs have increased for 2021.
Taxpayers can deduct contributions to a traditional IRA if they meet certain conditions. The deduction phases out if the taxpayer or his or her spouse takes part in a retirement plan at work. The deduction phase out depends on the taxpayer's filing status and income.
For single taxpayers covered by a workplace retirement plan, the 2021 phase-out range is $66,000 to $76,000, up from $65,000 to $75,000 for 2020.
For married couples filing jointly, when the spouse making the contribution takes part in a workplace retirement plan, the 2021 phase-out range is $105,000 to $125,000, up from $104,000 to $124,000 for 2020.
For an IRA contributor who is not covered by a workplace retirement plan but who is married to someone who is covered, the 2021 phase out range is between $198,000 and $208,000, up from $196,000 and $206,000 for 2020.
For a married individual who is covered by a workplace plan and is filing a separate return, the phase-out range is not subject to an annual COLA and remains $0 to $10,000.
The 2021 income phase-out ranges for Roth IRA contributions are:
$125,000 to $140,000 for singles and heads of household (up from $124,000 to $139,000 in 2020),
$198,000 to $208,000 for married filing jointly (up from $196,000 to $206,000 in 2020), and
$0 to $10,000 for married filing separately.
Saver’s Credit The income limit for low- and moderate-income workers to claim the Saver's Credit under Code Sec. 25B has also increased for 2021:
$66,000 for married couples filing jointly (up from $65,000 in 2020),
$49,500 for heads of household (up from $48,750 in 2020), and
$33,000 for singles and married filing separately (up from $32,500 in 2020).
The IRS has provided guidance to taxpayers that want to apply either Reg. §1.168(k)-2 and Reg. §1.1502-68, or want to rely on proposed regulations under NPRM REG-106808-19.
The IRS has provided guidance to taxpayers that want to apply either Reg. §1.168(k)-2 and Reg. §1.1502-68, or want to rely on proposed regulations under NPRM REG-106808-19, for:
certain depreciable property acquired and placed in service after September 27, 2017, by the taxpayer during its tax years ending on or after September 28, 2017, and before the taxpayer's first tax year that begins on or after January 1, 2021;
certain plants planted or grafted after September 27, 2017, by the taxpayer during its tax years ending on or after September 28, 2017, and before the taxpayer's first tax year that begins on or after January 1, 2021; and
components acquired or self-constructed after September 27, 2017, of certain larger self-constructed property and placed in service by the taxpayer during its tax years ending on or after September 28, 2017, and before the taxpayer's first tax year that begins on or after January 1, 2021.
Rev. Proc. 2020-25, 2020-19 I.R.B. 785, and Rev. Proc. 2019-43, 2019-48 I.R.B. 1107, are modified.
Change in Accounting Method The guidance applies to taxpayers who are changing their method of accounting for depreciable property that includes:
components described in Reg. §1.168(k)-2(c) or NPRM REG-106808-19 where the component election has already been made; and
specified plants for which the Code Sec. 168(k)(5) election has been made and that are planted, or grafted to a plant that was previously planted, after September 27, 2017, during the taxpayer’s 2017, 2018, 2019, or 2020 tax year.
This guidance does not apply to property or a plant:
that is impacted by a late election, or withdrawn election under Code Sec. 163(j)(7) after November 16, 2020, pursuant to Rev. Proc. 2020-22;
for which the taxpayer is changing from deducting the cost or other basis of such property as an expense to capitalizing and depreciating the cost or other basis, or vice versa; or
that the taxpayer does not own at the beginning of the year of change, with some exceptions.
In addition, this guidance cannot be used to make a late election, or revoke an election, under Code Sec. 168, Code Sec. 179, or Reg. §1.1502-68.
Taxpayers have a choice of applying the 2020 final regulations under T.D. 9916, the previous final regulations under T.D. 9874, or both the final regulations under NPRM REG-106808-19. However, once a taxpayer applies Reg. §1.168(k)-2 and Reg. §1.1502-68, the taxpayer must apply Reg. §1.168(k)-2 and Reg. §1.1502-68 to all subsequent tax years.
Automatic Extensions of Time Applicable taxpayers may make a late Code Sec. 168(k)(5) election, a late Code Sec. 168(k)(7) election, a late Code Sec. 168(k)(10) election, a late component election, a late designated transaction election, or a late proposed component election, by filing either:
an amended Form 1065 for the placed-in-service year of the property, or for the planting year of the specified plant, as applicable, on or before December 31, 2021; or
a Form 3115 with the taxpayer’s timely filed original Federal income tax return or Form 1065 for the taxpayer’s first or second tax year succeeding the tax year in which the taxpayer placed in service the property or the planting year of the specified plant, or, if later, the taxpayer’s timely filed original Federal income tax return or Form 1065 that is filed on or after November 6, 2020, and on or before December 31, 2021.
Effective Date This guidance is effective on November 6, 2020.
The IRS has adopted previously issued proposed regulations ( REG-106808-19) dealing with the 100 percent bonus depreciation deduction. In addition, some clarifying changes have been made to previously issued final regulations ( T.D. 9874). Changes to the proposed and earlier final regulations are largely in response to various comments submitted by practitioners, and generally relate to:
The IRS has adopted previously issued proposed regulations ( REG-106808-19) dealing with the 100 percent bonus depreciation deduction. In addition, some clarifying changes have been made to previously issued final regulations ( T.D. 9874). Changes to the proposed and earlier final regulations are largely in response to various comments submitted by practitioners, and generally relate to:
the definition of qualified used property;
the election to claim bonus depreciation on components acquired or self-constructed after September 27, 2017, for larger self-constructed property for which manufacture, construction, or production began before September 28, 2017;
application of the mid-quarter convention;
clarifications to the definition of qualified improvement property, predecessor, and class of property; and
clarifications to the rules for consolidated groups The rules for consolidated groups have also been moved from Proposed Reg. §1.168(k)-2(b)(3)(v) to new Reg. §1.1502-68.
Used Property The 2019 final regulations provide that in determining whether the taxpayer or a predecessor had a depreciation interest in property prior to its acquisition, only the five calendar years immediately prior to the current placed-in-service year are considered. The latest IRS regulations clarify that the five calendar years immediately prior to the current calendar year in which the property is placed in service by the taxpayer, and the portion of such current calendar year before the placed-in-service date of the property without taking into account the applicable convention, are taken into account. In addition, the five-year look-back period applies separately to the taxpayer and a predecessor.
Furthermore, if the taxpayer or a predecessor, or both, have not been in existence during the entire look-back period, then only the portion of the look-back period during which the taxpayer or a predecessor, or both, have been in existence is taken into account.
Expanded Component Election The prior regulations allow taxpayers to election to claim 100 percent bonus depreciation on components of certain larger constructed property that qualifies for bonus depreciation if the construction of the larger property began before September 28, 2017. The components must be acquired or constructed after September 27, 2017, and the larger property must be placed in service before 2020 (2021 in the case of property with a longer construction period). The final regulations remove the 2020/2021 cutoff date. In addition, the final regulations provide that eligible larger self-constructed property also includes property that is constructed for a taxpayer under a written contract that is not binding and that is entered into prior to construction for use in the taxpayer’s trade or business. The definition of a larger constructed property is also clarified.
Qualified Improvement Property The 15-year recovery period for qualified improvement property applies only to improvements "made by the taxpayer." The final regulations clarify that an improvement is considered made by a taxpayer if the property is constructed for the taxpayer. However, qualified improvement property received by a transferee taxpayer in a nonrecognition transaction described in Code Sec. 168(i)(7) is not eligible for bonus depreciation.
Mid-Quarter Convention The final regulations clarify that depreciable basis is not reduced by the amount of bonus deduction in determining whether the mid-quarter convention applies.
Binding Contracts Generally, property acquired pursuant to a binding contract entered into after September 27, 2017, does not qualify for bonus depreciation at the 100 percent rate. The final regulations clarify that a contract for a sale of stock of a corporation that is treated as an asset sale as the result of a Code Sec. 336(e) election made for a disposition described in Reg. §1.336-2(b)(1) is a binding contract if enforceable under state law.
Floor Plan Financing The IRS intends to issue guidance relating to transition relief for taxpayers with a trade or business with floor plan financing indebtedness that want to revoke elections not to claim bonus depreciation for property placed in service during 2018.
The IRS will not allow a taxpayer to limit the amount of its otherwise deductible floor plan interest in order to qualify for bonus depreciation. However, guidance will address transition relief for the 2018 tax year for taxpayers that treated Code Sec. 168(j)(1) as providing an option for a business with floor plan financing indebtedness to include or exclude its floor plan financing interest expense in determining the amount allowed as a deduction for business interest expense for the tax year.
Effective Date In general, the regulations apply to property acquired after September 27, 2017, and placed in service during or after a tax years that begins on or after January 1, 2021. However, they may be relied on for earlier tax years.