IRS Grants Extension for Late § 168(k)(7) Bonus Depreciation Election

IRS Allows Late Bonus Depreciation Election Due to Tax Preparer Error

The IRS granted a taxpayer’s request for an extension to make a late § 168(k)(7) election—allowing them to opt out of bonus depreciation for qualified property placed in service during tax years 2023–2025—after the taxpayer’s external tax preparer inadvertently omitted the election statement from the original returns. The ruling, issued via PLR-119791-25, permits the taxpayer to file amended returns to retroactively make the election under § 301.9100-3, shielding them from potential disallowance of depreciation deductions and associated tax liability adjustments. The IRS’s decision hinged on the taxpayer’s reasonable reliance on the preparer’s error, a factor that overcame the procedural default.

The Taxpayer’s Mistake: How the Election Was Overlooked

The taxpayer, a business in industry X, placed in service qualified property—5-year and 7-year property—during Year1, followed by additional 5-year property in Year2 and Year3. All property qualified under § 168(k)(2) and was designated for the § 168(k)(7) election, which allows taxpayers to opt out of bonus depreciation.

For each of these tax years, the taxpayer relied on Firm1, an external tax return preparer, to prepare and file its consolidated federal income tax returns (Forms 1120) and associated depreciation schedules (Form 4562). Throughout the preparation process, the taxpayer explicitly informed Firm1 of its intent to make the § 168(k)(7) election to forgo the additional first-year depreciation for the placed-in-service property.

Firm1 prepared the returns accordingly, omitting all § 168(k) depreciation for the specified property classes and completing Form 4562 consistent with the taxpayer’s intent. However, Firm1 personnel inadvertently failed to include the required § 168(k)(7) election statement in any of the consolidated returns. The returns were timely filed on extension, and the taxpayer’s internal tax personnel reviewed the Forms 1120 before filing but did not detect the omission.

After Year3, the taxpayer switched preparers and engaged Firm2 to prepare its Year4 return. During a routine review of prior-year returns, Firm2 discovered that the § 168(k)(7) election statement had never been attached to any of the consolidated returns for Year1, Year2, or Year3.

The Legal Battle: Why the IRS Granted the Extension

The IRS’s decision hinged on two key legal frameworks: the strict procedural requirements for the § 168(k)(7) election and the taxpayer’s eligibility for relief under § 301.9100-3. Section 168(k)(7) allows taxpayers to opt out of bonus depreciation for qualified property, but the election must be made by attaching a statement to the timely filed federal return (including extensions) in the manner prescribed by Form 4562 instructions. The IRS regulations explicitly require the election to be made on the original return or, if late, through a request for relief under § 301.9100. The taxpayer’s failure to attach the § 168(k)(7) election statement to its Year1–Year3 returns triggered the need for such relief.

The IRS applied § 301.9100-3, which grants discretionary extensions for late regulatory elections when the taxpayer demonstrates reasonable reliance on a qualified tax professional and that granting relief would not prejudice the government’s interests. Section 301.9100-3(a) requires the taxpayer to prove they acted reasonably and in good faith, while § 301.9100-3(b)(1)(v) deems reliance on a tax advisor—including an in-house professional—as reasonable and in good faith if the advisor failed to make or advise the election. The IRS concluded the taxpayer met these standards, as the omission stemmed from an oversight by internal tax personnel, not a strategic or willful disregard of the rules. The agency also determined that granting relief would not harm its interests, given the lack of revenue impact or audit complications from the delayed election.

What This Ruling Means for Taxpayers and Preparers

This ruling underscores the critical importance of verifying that regulatory elections—such as the § 168(k)(7) election to opt out of bonus depreciation—are properly made, even when relying on external or internal tax advisors. The IRS’s decision to grant relief in this case hinged on the taxpayer’s demonstration that the omission stemmed from an oversight by internal tax personnel, not a strategic or willful disregard of the rules. Taxpayers and preparers should treat this as a reminder that procedural diligence is non-negotiable, particularly for elections tied to complex provisions like § 168(k)(7), which allows opting out of additional first-year depreciation for specific property classes.

Failing to make the § 168(k)(7) election can lead to unintended consequences, including the automatic application of bonus depreciation where it may not be advantageous. For example, taxpayers in low-income years or those subject to alternative minimum tax (AMT) may prefer to avoid front-loading deductions, while others may seek to align federal and state tax treatments in non-conforming jurisdictions. The IRS’s willingness to grant relief in this case does not eliminate the risk of unintended deductions or the need for costly amended returns or private letter ruling requests.

It is also important to note that private letter rulings (PLRs) are non-precedential and apply only to the specific taxpayer and facts at issue. While this ruling may provide guidance for taxpayers in similar situations—particularly those facing advisor errors or internal oversights—it does not establish binding legal precedent. Taxpayers should consult their own tax advisors before relying on this ruling, as the IRS’s determination in this case was based on unique facts and representations.

The broader takeaway is clear: tax planning must include rigorous procedural safeguards, especially for elections that require strict adherence to timing and documentation requirements. The IRS’s decision to grant relief in this instance reflects a pragmatic approach to procedural errors, but it should not be interpreted as a license to overlook compliance. Taxpayers and preparers must remain vigilant in ensuring that all elections are timely and accurately made to avoid unintended tax consequences.