LLC Granted Extension to Opt Out of Bonus Depreciation After Advisor Missed State Tax Impact

Late Election Allowed for Partnership Blindsided by State Tax Rules

The IRS granted a partnership a 60-day extension to elect out of Section 168(k) bonus depreciation after the firm realized that claiming the federal deduction created adverse state tax consequences. Section 168(k) allows businesses to claim an additional first-year depreciation deduction for "qualified property." Relief was granted under Treasury Regulation § 301.9100-3, which provides procedures for seeking extensions of time for regulatory elections.

The Oversight: Advisor Misses State Tax Trap

The IRS granted a partnership a 60-day extension to elect out of Section 168(k) bonus depreciation after the firm realized that claiming the federal deduction created adverse state tax consequences. Section 168(k) allows businesses to claim an additional first-year depreciation deduction for "qualified property." Relief was granted under Treasury Regulation § 301.9100-3, which provides procedures for seeking extensions of time for regulatory elections.

The taxpayer, a limited liability company (LLC) treated as a partnership for federal tax purposes, engaged a qualified tax professional ("Advisor") to prepare its federal and state income tax returns. The LLC placed in service property that qualified for the Section 168(k) depreciation deduction and, on its timely-filed return, deducted the additional first-year depreciation. The Advisor, however, was unaware that claiming the Section 168(k) depreciation deduction would trigger unfavorable state tax consequences for the partners. As a result, the Advisor did not advise the LLC to elect out of taking the Section 168(k) depreciation. The LLC reviewed its federal income tax return before filing, but it was also unaware that claiming the Section 168(k) depreciation deduction could negatively affect each partner’s state income tax liabilities. The error was discovered during the preparation of a partner’s state income tax return. The Advisor promptly informed the LLC of the issue, leading the firm to seek relief from the IRS.

Legal Analysis: The Path to Relief

The IRS's decision hinged on granting an extension of time to make a regulatory election under Treasury Regulation § 301.9100-3. The specific election in question was under Section 168(k)(7), which allows a taxpayer to elect out of taking the additional first-year depreciation deduction (often called "bonus depreciation") for a class of property placed in service during the tax year.

Treasury Regulation § 301.9100-3 provides that the IRS may grant extensions for regulatory elections, such as the Section 168(k)(7) election, if the taxpayer acted reasonably and in good faith, and if granting relief would not prejudice the interests of the government.

The IRS concluded that the taxpayer met these standards. The taxpayer demonstrated reasonable cause and good faith because they relied on a qualified tax professional (the Advisor) who failed to advise them to elect out of Section 168(k) depreciation.

Implications: The Federal-State Depreciation Disconnect

The granting of relief in this Private Letter Ruling (PLR) highlights a crucial, often overlooked, area of tax compliance: the disconnect between federal and state depreciation rules. While Section 168(k) allows businesses to claim bonus depreciation (in this case, 80% given the implied 2023 tax year – the "One Big Beautiful Bill Act" or OBBBA enacted in 2025 permanently restored 100% bonus depreciation for property acquired and placed in service after January 19, 2025, terminating the TCJA phase-down for future years), states are not required to conform to this provision.

This means that even though a taxpayer can deduct a significant portion of an asset's cost immediately for federal purposes, many states require an "add-back" of the bonus depreciation amount, resulting in a higher state tax liability. This "decoupling" from federal rules forces taxpayers to maintain separate depreciation schedules for state and federal purposes, complicating asset tracking and potentially impacting gain or loss calculations upon disposal. Because state and federal basis will differ, any future sale of the asset will result in different gain/loss calculations for state and federal purposes.

While this PLR is only applicable to the specific taxpayer who requested it, and Section 6110(k)(3) prevents it from being cited as precedent, it signals a willingness by the IRS to grant relief under Treasury Regulation § 301.9100-3 when taxpayers, relying in good faith on qualified advisors, inadvertently fail to make elections due to the complexities of state tax laws. This serves as a reminder to practitioners to thoroughly consider the state tax implications of federal elections, particularly in areas where states often diverge from federal treatment.