719 / How did the 2020 CARES Act fix the “Retail Glitch” to allow additional business owners to elect bonus depreciation?

The CARES Act provided retroactive relief for many business owners, including fixing the so-called “retail glitch” to allow businesses to take advantage of 100 percent bonus depreciation on qualified improvement property.¹ The CARES Act retroactively reduced the recovery period for qualified improvement property placed in service after 2017 from 39 years to 15 years. Eligible taxpayers could seek a refund. Corporate taxpayers should also examine the interaction between the depreciation relief and the CARES Act NOL carryback relief.

The IRS has provided guidance on how to make, revoke or withdraw elections relating to the CARES Act bonus depreciation rule changes. Because of the administrative burden of filing amended returns and average accounting returns (AARs), the IRS treated late or revocable elections for property placed in service by taxpayers during their 2018, 2019, or 2020 taxable years, as a change in method of accounting with a Section 481(a) adjustment for a limited period of time. As a result, taxpayers could generally make, revoke or withdraw elections with respect to bonus depreciation by filing an amended tax return, AAR or Form 3115 (with the taxpayer’s federal income tax return or Form 1065). The action was treated as changing from an impermissible method of determining depreciation to a permissible method. Returns or forms generally had to be filed by October 15, 2021. This amended return or AAR was required to include the adjustment to taxable income for the change in determining depreciation of the qualified improvement property and any collateral adjustments to taxable income or to tax liability.²

These election methods did not apply to certain farming businesses or electing real property businesses, who were required to make elections under the procedures in Revenue Procedure 2020-22. Partnerships subject to the partnership audit rules used the procedures in Revenue Procedure 2020-23.

Revenue Procedure 2020-23 provided relief so that partnerships subject to the new partnership audit rules could also file amended returns, rather than waiting to file current year returns to claim the benefits. Preexisting law might have prevented partnerships from filing amended Forms 1065 and Schedules K-1.³ Partnerships could file amended returns and issue revised Schedules K-1 for 2018 and 2019 to take advantage of retroactive CARES Act bonus depreciation relief.

The Revenue Procedure 2020-23 relief applied for 2018 and 2019 as long as the original Forms 1065 and Schedules K-1 were filed/issued before April 13, 2020 (the date Rev. Proc. 2020-23 was released). Partnerships could file amended Form 1065 and Schedule K-1 (electronically or by mail), by checking the Form 1065 “amended return” box and writing “FILED PURSUANT TO REV PROC 2020-23” at the top. The same notation was required to be included in a statement attached to amended Schedules K-1 sent to partners. The amended returns had to be filed/furnished to partners by September 30, 2020.