making 168(k)(7) election to opt out of not taking bonus depreciation on schedule E rental property

[gn]

When deciding not to take 1st year bonus depreciation for 7 year property improvements for a rental property recorded on Sch E on a 1040 does the election have to be made on screen 46 in Lacerte or can you opt out of taking the bonus depreciation on screen 22 by checking the elect out of SDA and not make the election? It shows up as an informational diagnostic which means you can efile without making it but will this cause an issue with the IRS meaning will it automatically send a letter to the taxpayer for more information? 

Does opting out prevent the taxpayer from bonus depreciation for this property for all asset classes even though its expires in 2025, if not sooner? or is the election only for that property class for that year? 

The taxpayer has existing passive loss limitations so bonus depreciation in 2020 gives no tax benefit. 

[TaxGuyBill]

Opting out only applies for this one year.  Bonus is used again in all future years unless they opt out again (each year).

For your comment about not the depreciation not being able to be used due to passive loss limitations, that doesn't necessarily mean you should opt out because it using Bonus will just add to the passive loss carryover and it EVENTUALLY will be used.

As for how to do it in Lacerte, sorry, I can't help you there, I'm a ProSeries user.  But your comment "checking the elect out of SDA and not make the election" doesn't really make sense to me.  What do you mean by "not make the election"?  In order to "opt out" of Bonus, you NEED to make an election.

[gn]

Going forward the passive loss limitation is capped with a MAGI above 150k which they will be so it does them no tax benefit to take full bonus depreciation this year and the state does not follow federal so its best to not take it for improvements made in 2020.

In Lacerte when entering in the asset there is a box to check to not calculate bonus or SDA depreciation. By checking the box on screen 22 the asset input screen you change the calc to the entire useful life not the full year first year depreciation in 2020. However it does not add in the election to the tax return, it has an informational diagnostic stating you did not make the election but it does not prevent an efiling of the return. So my question is is the election required to opt out of bonus depr if its not there will it bring any IRS questions or any unwanted correspondence or do we have to make the official election and make it part of the return? 

[PKCPAMST · Accepted solution]

Go to Screen- 46 to make the affirmative election.

[TaxGuyBill]

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@gn wrote:

or do we have to make the official election and make it part of the return? 

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As I stated before, you NEED to make an election in order to "opt out" of Bonus depreciation.

[Michael Duran]

The election is showing up on a 2022 individual return and I can't get rid of it.  It's applying to all eligble property and i don't want to make the election.

[TaxGuyBill]

Have you gone through EVERY new asset to make sure that you did not make the election?

[Michael Duran]

Yes, no new assets this year and I went through each existing asset just in case.

[TaxGuyBill]

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@Michael Duran wrote:

It's applying to all eligble property and i don't want to make the election.

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If there are no new assets, how is it applying anything?  With no new assets, there is no "eligible property".

[Michael Duran]

That's what I can't figure out.  I will check with Lacerte.  I just don't want the election to be in-place if the client later finds that they forgot to give me an asset they purchased.

Thank you for your input. 

[Michael Duran]

Lacerte found it.  On input screen 22, the first asset had a box checked I did not see before.

[pamdory]

My experience is that if you make the election to opt out of all SDA on screen 22 with the button just below "Depreciation (4562)" (the button next to the  Vehicle Expense button)   it carries forward with the proforma.  If in the subsequent you don't want to opt out, you have to go back and uncheck the box.  Using this button suppresses SDA on all classes and generates the election statement.  When opting out on just one class, the election must be made on each asset in that class using the in the next section on Screen 22 "Asset Information" under General .  IIRC this won't proforma like the blanket method.