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Simon says to fix your QIP problems, so do it

On perhaps the most deeply personal album of his career, “Blood on the Tracks,” Bob Dylan had a line from a song called “Idiot Wind,” “I can’t help it if I’m lucky.”Jim Hamill

I suppose in some ways we can all say that, at least in some aspect of our lives.

For me, it was working closely with great people in my field when I worked for very, very big accounting firms. In Philadelphia my partner-in-charge, Frank, was one of the top corporate tax experts in the firm. In Phoenix, my new partner-in-charge, Ray, was likely the top partnership/real estate tax person in the firm.

They were complete opposites in personality. But they both fit my needs well. I was like the studio musician who would sit quietly and listen, and jump in when I figured out the tune. But Frank had what seemed to me to be one odd flaw. He was the firm-designated expert in accounting methods and periods.

This is a flaw? Well it seemed to me to be one. CPAs must take continuing education annually. Big firm professionals are forced, at least once, to take an accounting methods and periods course. No one likes it.

But Frank, being cleverer than me, knew better how important the topic was to tax planning. In tax practice, timing is everything. Deductions are best reported early, income late. But there are rules for such things.

The recent CARES legislation retroactively changed the depreciable life of something called “qualified improvement property,” or QIP in its acro-name form. I wrote about this a few weeks ago. I endorsed filing a Form 3115 to change the method of accounting.

Well, OK, you say, I must have been napping when I reached that part of your column. After all, you clarify, it will take a long hard shelter-in-place period for me to get to accounting methods and periods on my reading list.

IRS classifies accounting methods as permissible or impermissible. People often file returns with impermissible methods. It’s like touching your nose before Simon says you can do that. It’s just not right.

So when 2018 returns were filed, and even some 2019 returns, people reported QIP as 39-year depreciable property. They thought Simon said to do this. Turns out he did not, at least not with the hindsight of the new legislation.

In the film trilogy “Back to the Future,” Marty McFly was warned that when he went back in time he should not change anything that would affect the future. This was good advice. Congress missed the film. So they went back to 2018 and changed the future.

Tax returns filed in 2018 are now wrong if there was QIP placed in service in that year. Same with the early-filed 2019 returns. An impermissible method was used.

It seemed permissible back in 2018. Tax preparers were certain they heard Simon say to report 39-year lives for QIP. But Sen. McFly went back in time and changed the life to 15 years. The law now requires a full write-off in 2018 or an election to instead use a 15-year life.

So the 2018 returns with QIP use an impermissible method. As Dodger fans say about the 2017 World Series “loss” to the Astros, “this cannot stand.” It must be corrected – retroactively.

There are a few ways to fix the impermissible prior method. An amended return is possible. An IRS form 3115 may instead be filed this year to change the method to a permissible one. This will be automatically approved. This is the easier way to handle the problem.

Normally the election to depreciate 15-year QIP property rather than expensing must be done on an original return. But IRS will allow a late election to mitigate the damage done by going back in time to change the future.

Why would you not take the big expense deduction when you fix this problem? Some people cannot benefit from big deductions, particularly for real estate investments, and QIP is real estate.

So there are choices. But Simon says, fix the problem. If you had 2018 QIP, your tax preparer will have to obey. We thought the 2018 treatment was right. Now it is not. It cannot stand.

James R. Hamill is the Director of Tax Practice at Reynolds, Hix & Co. in Albuquerque. He can be reached at jimhamill@rhcocpa.com.

 

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