Under the 2017 tax reform legislation (the Act), the maximum corporate tax rate for tax years beginning after 2017 is reduced from 35% to 21%. Thus, taxpayers will obtain permanent tax benefits if a deduction can be taken at the 35% rate rather than at the 21% rate. If a taxpayer is using an improper method that understates depreciation for federal tax purposes, the taxpayer may be able to change its method to recapture missed depreciation in 2017 to claim those deductions at the higher corporate tax rate.
The Act also includes a Section 965 ‘transition tax’ on unrepatriated foreign earnings and profits (E&P), which theoretically could be reduced with accounting method changes that reduce E&P. However, the IRS has indicated its intent to issue regulations that will not permit taxpayers to use adjustments related to changes in methods of accounting to reduce their Section 965 tax liability. Nonetheless, if a taxpayer uses an improper method that understates depreciation for E&P purposes, the taxpayer still may be able to reduce E&P for understated depreciation on certain assets, as described in more detail in the insight.
Taxpayers still may have an opportunity to make adjustments to depreciation to permanently reduce their tax liability for 2017. A taxpayer that underdepreciated an asset for federal income tax purposes may be able to change its method by filing a Form 3115 with its 2017 federal income tax return to recapture missed depreciation and take advantage of the higher rate for those deductions. In addition, a specified foreign corporation with assets placed in service in tax years ending before December 30, 2003, or in 2016 or 2017, may be able to adjust E&P for missed depreciation to reduce its Section 965 transition tax liability.