Question: Ryan has a Schedule C business where he has a piece of 5-year class life equipment that he placed in service in 2022. The equipment is qualified property and eligible for bonus depreciation; however, when Ryan timely filed his 2022 tax return, he did not claim bonus depreciation and did not elect out of claiming bonus depreciation. He has also timely filed his 2023 return, continuing to claim depreciation on the asset. Realizing that he should have either claimed bonus depreciation or elected out, Ryan wants to amend his 2022 return to claim bonus depreciation since he is still within the statute of limitations. Can Ryan amend his 2022 tax return to claim the bonus depreciation he was eligible to take?

Answer: No, Ryan cannot amend his tax return to claim bonus depreciation. Instead, he must file Form 3115, Change in Method of Accounting, to claim the missed bonus depreciation. The return is past the due date; therefore, Ryan cannot elect out of bonus depreciation. Because no affirmative election-out was made, Ryan is required to compute depreciation and basis of the equipment as if bonus depreciation was taken; therefore, he should file Form 3115 to claim the missed depreciation to receive the benefit of the deduction. In instances where a taxpayer timely files their tax return without affirmatively electing out of depreciation, they can go back and make the election-out on an amended tax return within six months of the due date of the original return, excluding extensions, and writing “filed pursuant to Section 301.9100-2” at the top of the return. Because Ryan’s return is past the six-month mark, he should file Form 3115 to claim the missed bonus depreciation since no affirmative election-out was made.

Reporting the sale of a rental property involves understanding capital gains, depreciation recapture and specific tax laws. The sale may not seem that complicated, but there can be unexpected tax liabilities the client didn’t consider.

Below, you’ll find a few of the top questions from a recent webinar on the topic and their accompanying answers. If you choose to attend the on-demand version of this webinar, you can access the full recording and the entire list of Q&As.   

Q: How do you handle a sale of a property that was first personal, then rental, and then moved back to personal use?

A: The rental period counts as nonqualified use. Additionally, any depreciation taken during the rental period is taxable to the extent of gain on the sale and cannot be excluded under the §121 exclusion rules.

Q: If §121 excludes all taxable income from the sale, does the taxpayer still need to report it on their tax return?

A: No. If the taxpayer meets the §121 ownership and use requirements and did not claim depreciation on the property, they do not need to report the sale on Form 1040.

Q: What if the rental room is part of an apartment that the person does not own? Is depreciation allowed?

A: Depreciation cannot be claimed on property that the taxpayer does not own.

Q: What happens to suspended passive losses if the rental property becomes the taxpayer’s primary residence?

A: The suspended passive losses remain suspended until the taxpayer either sells the property or their adjusted gross income (AGI) allows them to take advantage of the special $25,000 passive loss deduction.

To learn more about reporting the sale of rental property, you can watch our on-demand webinar. NATP members can attend for free, depending on membership level! If you’re not an NATP member and want to learn more, join our completely free 30-day trial.

A recent IRS private letter ruling (PLR 202434006) allows employers to provide their employees with a choice as to how an employer contribution to a benefits program will be used that includes student loan reimbursements. The ruling addressed an employer’s new employee choice plan that allows an eligible employee to make annual elections before the start of each year to direct employer contributions to the employee’s:

• 401(k) defined contribution plan account as an employer contribution
• Health savings account
• Student loan reimbursements through an educational assistance plan
• Retiree health reimbursement arrangement

The plan would not allow employees to receive the employer funds in cash or as a taxable benefit. The PLR does not address the question of whether an employee can have their employer’s contribution split among two or more of the above-listed options, but it also does not bar employees from doing so.

The IRS’s ruling is notable because it allows an educational assistance program to reimburse qualified student loan payments if the plan provides for the reimbursements. The U.S. Coronavirus Aid, Relief, and Economic Security Act (CARES Act) of 2021 amended §127 to permit qualified student loan payments to be reimbursed from an educational assistance program until Jan. 1, 2026.

The unnamed business that requested the PLR asked the IRS whether an employer contribution can be contributed to the four options listed above without jeopardizing the plan’s qualified status. The IRS found that when an employee makes an irrevocable election to have employer dollars allocated to the program or programs of their choice prior to the beginning of the plan year, it will not treat them as elective contributions so long as the other rules governing the plans are followed.

While PLRs are generally considered to show the IRS’s thinking on an issue, only the taxpayer who requests the ruling can rely on it. It is recommended that any employers considering setting up a similar employee choice plan seek the approval of the IRS before doing so to reduce the risk of the agency finding fault with their plan.