With a technical correction introduced by the CARES Act, taxpayers can now claim 100% bonus depreciation on qualified improvement property. But there are still certain requirements that must be met.
Key insights
- The CARES Act is bringing more than relief to taxpayers. It also corrects a technical error surrounding qualified improvement property.
- With this correction, such property moves from a 39-year recovery period to a 15-year period and is eligible for bonus depreciation.
- This could present a tax savings opportunity, if you meet the requirements.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act brought a long-awaited technical correction to the Internal Revenue Code’s depreciation rules. With the correction, qualified improvement property (QIP) will now be eligible for 100% bonus deprecation for assets acquired after September 27, 2017, and placed in service after December 31, 2017. This is welcome news to taxpayers and could present a significant opportunity to capture additional depreciation deductions for assets placed in service after December 31, 2017.
Background on the QIP technical error
The issue arose in the Tax Cuts and Jobs Act (TCJA) of 2017. The TCJA consolidated qualified leasehold improvement property, qualified retail improvement property, and qualified restaurant property into a new category of assets called qualified improvement property. The TCJA intended to make QIP eligible for 100% bonus depreciation under Section 168; however, the statute was not properly amended.
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QIP was to have a 15-year recovery period, but Section 168 was not revised to include QIP as 15-year property. This was significant, because property must have a recovery period of 20 years or less to be eligible for bonus depreciation. Thus, failing to list QIP as 15-year property meant it was ineligible for bonus depreciation and QIP assets defaulted to a 39-year recovery period. The Department of the Treasury acknowledged that this was simply an oversight. Nevertheless, with the gridlock in Congress that followed enactment of the TCJA, a technical correction eluded taxpayers for more than two years.
Definition of qualified improvement property
QIP generally refers to improvements made to an interior portion of a building that is nonresidential real property, if such improvements are made after the date such building was first placed in service. Amounts that are attributable to the following, however, are excluded from the definition of QIP:
- Enlargement of a building
- Elevators or escalators
- The internal structural framework of a building
QIP treatment can be significant if you perform interior renovations to office, retail, or commercial space. Additionally, both landlords and tenants can take advantage of QIP assets.
Technical correction becomes official
As part of the third wave of coronavirus legislative measures, the CARES Act finally provided a fix to the technical error in the TCJA. Specifically, Section 2307 of the Act classified QIP as 15-year property. With this amendment, QIP is now eligible for 100% bonus depreciation for assets acquired after September 27, 2017, and placed in service after December 31, 2017.
Opportunity for taxpayers
The technical fix presents an opportunity for you to go back to your 2018 and 2019 tax years and claim bonus depreciation for QIP-eligible assets. The correction can be made by filing an amended tax return or a Form 3115 (Application for Change in Accounting Method), depending upon your specific circumstances.
Taxpayers that are using the Alternative Depreciation System (ADS) for their QIP assets may also realize a benefit from the correction by reclassifying such assets under the ADS from 40-year property to 20-year property. This might be an opportunity, for instance, if you were required to use the ADS because you elected out of the Section 163(j) interest expense limitation as a real property trade or business.
How we can help
To learn more about how this change or other tax savings opportunities can benefit your organization, please contact your CLA tax advisor.