Rev. Proc. 2020-50

Where this comes from

The Tax Cuts and Jobs Act of 2017 changed the bonus depreciation rules starting September 28, 2017. The IRS issued proposed regulations and then final regulations (Treasury Decision 9916) in September 2020 to spell out exactly how the TCJA rules work.

Between 2017 and 2020, many taxpayers had filed returns under the proposed regulations, the temporary regulations, or earlier guidance. Revenue Procedure 2020-50, published in November 2020, gave those taxpayers a clear path to adopt the final rules retroactively if they chose to.

What it established

The procedure allows a taxpayer to change to the final bonus regulations for property placed in service in 2017, 2018, 2019, or 2020. It works within the Rev. Proc. 2015-13 automatic-change framework. The change is made by filing Form 3115 with the return for the year of change.

The component election under Treasury Regulation 1.168(k)-2(c) is the piece most directly tied to cost segregation. That regulation allows a taxpayer to separately account for the components of a larger item of property for bonus purposes. In plain terms, a building might be acquired as one asset. A cost segregation study identifies its 5-year, 7-year, and 15-year components. The component election lets you bonus those components individually, even though the acquisition was of the whole building.

The procedure also provides a path to revoke Section 168(k)(7) opt-out elections that were made under prior guidance. A taxpayer who had elected out of bonus for a class of property could use this procedure to revoke that election and claim the bonus under the final rules.

How it shows up in a study

For a look-back cost segregation study covering property placed in service from 2017 through 2020, Rev. Proc. 2020-50 is often the mechanism that makes the study work. The study identifies the short-life components. The component election under 1.168(k)-2(c) separates those components from the rest of the building cost for bonus purposes. The retroactive application procedure and Form 3115 then bring the resulting 100% bonus into the current year as a single negative Section 481(a) adjustment.

This is the path from a study's classification schedule to a large current-year deduction on property that may have been placed in service several years ago.

What it does not mean

The procedure provides the path to apply the final regulations, not a guarantee that any particular amount of bonus is owed. The component classification still has to be right. If the study's underlying reclassifications are wrong, the procedure does not fix them.

The retroactive reach is also limited to 2017 through 2020. Property placed in service in 2021 or later uses the final regulations as the starting point without needing this retroactive procedure.

And using the procedure does not confer audit protection on the underlying study. The IRS agrees to the method change; it does not endorse the asset-by-asset classification. A well-documented study with defensible methodology is still essential.