By Joshua Rosenberg

Law360 (April 28, 2020, 2:18 PM EDT) -- Recent guidance issued by the IRS that allows late elections for retailers to take advantage of bonus depreciation for renovations complements Congress' fix of the so-called retail glitch in a way that will give retailers quicker access to much-needed liquidity.

Rev. Proc. 2020-25, issued by the Internal Revenue Service on April 17, provided procedures for retailers to make several late elections with respect to the depreciation of qualified improvement property to benefit from a change in the Coronavirus Aid, Relief and Economic Security Act allowing businesses to immediately expense the costs of renovations. The CARES Act fixed an unintended consequence of the 2017 tax reform law that barred qualified improvement property, or QIP, from being eligible for bonus depreciation. 

The revenue procedure also exempts retailers from complying with the uniform capitalization accounting rules, which can be burdensome, and provides them a workaround to filing amended returns to help them more quickly access crucial funds as they contend with the economic consequences of the novel coronavirus pandemic. 

With the IRS shuttering office locations across the country, retailers would have encountered delays in receiving their QIP funds if they were to file amended returns, according to tax professionals and trade associations.

"The IRS recognizes that we're in a genuine economic crisis right now," Ellen McElroy, tax partner at Eversheds Sutherland, told Law360. "Their guidance reflects that." 

Getting the retail glitch fix into the CARES Act was a major victory for retailers, who had fought for years to fix the drafting error, according to David Koenig, vice president for tax at the Retail Industry Leaders Association.

After trade groups worked to secure the provision's place in the legislation, the retailers association engaged the IRS' Office of Chief Counsel to allow retailers to submit Form 1139 instead of filing amended returns for the 2018 and 2019 tax years, in order to receive their QIP funds faster, Koenig told Law360. 

Form 1139, Corporation Application for Tentative Refund, allows companies to apply for a quick refund of taxes for net operating loss carrybacks and other items. The IRS typically responds to Form 1139 submissions within 90 days, while it may take up to 16 weeks to process amended returns, according to the IRS' website. 

While Rev. Proc. 2020-25 was silent regarding Form 1139, the guidance provided other avenues for quickly assessing liquidity without completing amended returns, McElroy said. 

For example, the guidance allowed retailers to apply for a change in accounting method by filing a Form 3115, she said. Businesses may use the accounting method change to file net operating loss carryback claims for previous years, which was a provision Congress also included in the CARES Act, she said. 

Additionally, businesses may be entitled to refunds if their adjustments under Internal Revenue Code Section 481(a) are combined with QIP deductions, she said. IRC 481(a) is meant to prevent omission or duplication of income or deductions when accounting method changes are initiated. 

That's a change many retailers will appreciate, especially given the dire economic circumstances shop owners are facing, McElroy said.

"Many taxpayers will appreciate the flexibility provided in [Rev. Proc. 2020-25] to seek missed QIP using these approaches," she said.

Another beneficial aspect of the revenue procedure was that it provided an accounting method change specific to the QIP provision, Tracy Watkins, senior director at RSM US LLP, told Law360. 

Typically, accounting changes related to depreciation need to be in compliance with the uniform capitalization rules, or UNICAP, provided under IRC Section 263A , Watkins said, which involve indirect costs that can be capitalized to inventory.

Crucially, the IRS revenue procedures allow retailers to file the accounting method changes for QIP without coming into compliance with UNICAP, Watkins said.

"The ability to file the change request without having to be in compliance with it is really key and helpful to a lot of taxpayers," she said.

The IRS' revenue procedure also allows for greater flexibility when individuals make an election, or revoke an election, under IRC Section 168(k)(5) , which governs farmers' depreciation of certain classes of plants, McElroy told Law360.

Before the agency issued its guidance, farming businesses that wished to revoke the election they had made under IRC 168(k)(5) would have had to apply for permission from the IRS via a private letter ruling, she said. 

But under the recent revenue procedure, businesses can revoke the elections for tax years 2018 through 2020 if they act within a limited time frame, McElroy said.

"What this means as a practical matter is that a taxpayer has discretion regarding both when and how elections are made and changed," she said. "The ability to make a late election into bonus or out of bonus depreciation with an amended return or to treat it as an accounting method change gives the taxpayer significant flexibility."

--Editing by Tim Ruel and Neil Cohen.

Clarification: This article has been changed to clarify the effect of the revenue procedure.

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