SECTION 2. BACKGROUND

.01 Alternative depreciation system un- der § 168(g) for residential rental prop- erty .

(1) Prior to amendment by §§ 13204 and 13205 of Public Law 115-97, 131 Stat. 2054 (2017), commonly referred to as the Tax Cuts and Jobs Act (TCJA), § 168(g) (1) of the Code provided that the depreciation deduction provided by § 167(a) of the Code is determined under the ADS for: (A) any tangible property that during the taxable year is used predominantly outside the United States; (B) any tax-exempt use property; (C) any tax-exempt bond financed property; (D) any imported property covered by an Executive order under § 168(g)(6) of the Code; and (E) any property to which an election under § 168(g)(7) of the Code applies. Sections 13204(a)(3)(A) and 13205(a) of the TCJA amended § 168(g)(1) of the Code by requiring the depreciation deduction provided by § 167(a) of the Code to be determined under the ADS for the following additional property: nonresidential real property, residential rental property, and qualified improvement property held by an electing real property trade or business as defined in § 163(j)(7)(B) of the Code; and any property with a recovery period of 10 years or more that is held by an electing farming business as defined in § 163(j)(7) (C) of the Code. These amendments apply to taxable years beginning after December

31, 2017, without regard to when the property is or was placed in service. See TCJA § 13204(b)(2) and § 13205(b).

(2) Prior to amendment by the TCJA, the table of recovery periods under § 168(g)(2)(C) of the Code provided that the recovery period under the ADS was 40 years for residential rental property. Section 13204(a)(3)(C) of the TCJA amended that table by providing that the ADS recovery period is 30 years for residential rental property. Prior to the enactment of the TCDTRA, this amendment applied only to property placed in service after December 31, 2017. See TCJA § 13204(b) (1).

(3) Therefore, although the TCJA added residential rental property held by an electing real property trade or business to the list of property to which the ADS is applicable, the change in recovery period from 40 years to 30 years for all residential rental property applied only to property placed in service after December 31, 2017. See TCJA § 13204(b)(1) and (2). (4) Section 202 of the TCDTRA amended § 13204(b) of the TCJA to add new § 13204(b)(3) of the TCJA. Section 13204(b)(3) of the TCJA provides that in the case of any residential rental property (i) that was placed in service before January 1, 2018, (ii) that is held by an electing real property trade or business, as defined in § 163(j)(7)(B) of the Code (electing real property trade or business), and (iii) for which § 168(g)(1)(A) through (E) of the Code did not apply prior to January 1, 2018, the amendments made by § 13204(a)(3)(C) of the TCJA apply to taxable years beginning after December 31, 2017. Accordingly, such residential rental property has a 30-year recovery period under the ADS for taxable years beginning after December 31, 2017.

(5) Unless otherwise provided, all references hereinafter in this revenue procedure to § 168(g) of the Code are references to § 168(g) of the Code as in effect on December 28, 2020, the day after the enactment date of the TCDTRA.

.02 Rev. Proc. 2019-08 . (1) On January 14, 2019, the Department of Treasury (Treasury Department) and the Internal Revenue Service (IRS) published Rev. Proc. 2019-08 to provide guidance, in part, on the recovery period under the ADS for residential rental prop

erty placed in service before 2018 and on how taxpayers can change their computation of depreciation to the ADS for certain properties held by electing real property trades or businesses.

(2) Section 4.01(1) of Rev. Proc. 201908 provides that the recovery period under the table in § 168(g)(2)(C) of the Code is 30 years for residential rental property placed in service by the taxpayer after December 31, 2017, and 40 years for residential rental property placed in service by the taxpayer before January 1, 2018. To comply with § 202 of the TCDTRA, section 6 of this revenue procedure modifies section 4.01 of Rev. Proc. 2019-08 to provide that the 30-year recovery period also applies to certain residential rental property placed in service before January 1, 2018, and held by an electing real property trade or business for taxable years beginning after December 31, 2017.

(3) Sections 4.02(1) and 4.02(2)(a) of Rev. Proc. 2019-08 provide that for the election year (that is, the first taxable year for which a trade or business makes an election under § 163(j)(7)(B) and the regulations thereunder), the electing real property trade or business must begin depreciating nonresidential real property, residential rental property, and qualified improvement property in accordance with the ADS. This rule applies to such properties placed in service by the electing real property trade or business in the election year and all subsequent taxable years (newly-acquired property), and to such properties placed in service by the electing real property trade or business in taxable years beginning before the election year (existing property). Pursuant to section 4.02(2)(b) of Rev. Proc. 2019-08, a change in use occurs under § 168(i)(5) and § 1.168(i)-4(d) of the Income Tax Regulations for existing property as a result of an election under § 163(j)(7)(B). Therefore, depreciation for such property is determined in accordance with the rules under § 1.168(i)-4(d).

.03 Method of accounting . (1) Section 446(e) and § 1.446-1(e)(2) require a taxpayer to secure the consent of the Commissioner of Internal Revenue (Commissioner) before changing a method of accounting for Federal income tax purposes. Section 1.446-1(e)(3)(ii) authorizes the Commissioner to prescribe ad

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ministrative procedures setting forth the limitations, terms, and conditions necessary to permit a taxpayer to obtain consent to change a method of accounting.

(2) Section 2.05 of Rev. Proc. 201513, 2015-5 I.R.B 419, 425, provides that a taxpayer may not request, or otherwise make, a retroactive change in method of accounting, unless specifically authorized by the Commissioner or by statute.

(3) Section 1.446-1(e)(2)(ii)( d )( 3 )( ii ) provides that a change in computing depreciation or amortization allowances in the taxable year in which the use of an asset changes in the hands of the same taxpayer is not a change in method of accounting. See also § 1.168(i)-4(f).

(4) Section 1.446-1(e)(2)(ii)( d )( 5 )( iii ) provides that a change from an impermissible method of computing depreciation to a permissible method of computing depreciation for an asset results in a § 481(a) adjustment.

(5) With the enactment of the TCDTRA, immediate guidance is needed under § 168(g) of the Code for taxpayers who are affected by the retroactive effective date of § 13204(b)(3) of the TCJA. Accordingly, this revenue procedure permits taxpayers to file an amended Federal income tax return or information return, administrative adjustment request under § 6227 of the Code (AAR), or a Form 3115, Application for Change in Account- ing Method, to change their method of computing depreciation of certain residential rental property held by an electing real property trade or business to use a 30-year ADS recovery period and, if such property is included in a general asset account, to change their general asset account treatment for such property to comply with § 1.168(i)-1(h)(2). See section 4.04 of this revenue procedure for the procedures to change to a 30-year recovery period.

(6) The Treasury Department and the IRS are aware that some taxpayers may have elected to be an electing real property trade or business for their taxable year beginning in 2019 (2019 taxable year), and thereby changed to a 40-year ADS recovery period for residential rental property placed in service before 2018 under the change in use rules for the 2019 taxable year. The Treasury Department and the IRS also are aware that some of those taxpayers may not have made the adjust

ments to general asset accounts under the change in use rules in § 1.168(i)-1(h)(2) for the 2019 taxable year. To the extent those taxpayers have not yet filed their Federal income tax return or Form 1065, U.S. Return of Partnership Income, for the taxable year beginning in 2020, the change to the 30-year recovery period for residential rental property to comply with the TCDTRA or to the method of accounting provided in § 1.168(i)-1(h)(2) would be made on an amended Federal income tax return or information return, or an AAR, as applicable. See Rev. Rul. 90-38, 1990-1 C.B. 57 (a taxpayer adopts an impermissible method of accounting for a material item by treating the item in the same way in determining the gross income or deductions in two or more consecutively filed Federal income tax returns). However, consistent with section 4 of Rev. Proc. 2007-16, 2007-1 C.B. 358, this revenue procedure provides these taxpayers with the option of changing to a 30-year recovery period or to the method of accounting provided in § 1.168(i)-1(h)(2) by filing a Form 3115 in lieu of an amended Federal income tax return or information return, or an AAR. See sections 4.01(2) and 4.04(2) of this revenue procedure for the procedures to change to a 30-year recovery period by filing a Form 3115. See sections 4.02(3) and 4.04(2) of this revenue procedure for the procedures to change to the method of accounting provided in § 1.168(i)-1(h)(2).

.04 Earnings and profits . In the case of tangible property to which § 168 applies, § 312(k)(3)(A) provides that the adjustment to earnings and profits for depreciation for any taxable year generally is determined under the ADS within the meaning of § 168(g)(2). If a change in use occurs for such property under § 168(i)(5) and § 1.168(i)-4 for Federal income tax purposes, the adjustment to earnings and profits for depreciation under § 312(k)(3) (A) for such property beginning for the year of change, as defined in § 1.168(i)4(a), is determined under the ADS in accordance with § 1.168(i)-4. However, if the depreciation method and recovery period for such property under the ADS are the same before and after the change in use for § 312(k)(3)(A), the adjustment to earnings and profits for depreciation under § 312(k)(3)(A) is not affected by the change in use.