Taxpayers and practitioners nationwide have been waiting over 2 years for a technical correction to fix an error in the 2017 Tax Cuts & Jobs Act (TCJA) related to depreciation of Qualified Improvement Property (QIP). The error was finally fixed in the recently enacted Coronavirus Aid, Relief and Economic Security Act (CARES Act), and the change has created significant tax-reduction opportunities for some taxpayers.
Prior to the TCJA, non-residential improvements were classified as either Qualified Leasehold Improvements, Qualified Restaurant Property, or Qualified Retail Improvement Property. The TCJA replaced these three types with one “Qualified Improvement Property” classification. Congress intended for QIP to be 15-year property eligible for bonus depreciation, but the law, which was written and enacted in haste, incorrectly gave QIP a 39-year depreciable life, making it ineligible for bonus depreciation.
QIP is defined as improvements to an interior portion of a nonresidential building. It must be placed in service after the building was first placed in service and can include no improvements for the enlargement of the building, for elevators or escalators, or for the internal structural framework of the building.
Changes Under the CARES Act
Under the CARES Act, QIP is now classified as 15-year property and eligible for 100% bonus depreciation through 2022, as it was originally intended. Additionally, QIP will be subject to a 20-year life under the Alternative Depreciation System (ADS). The change is effective for tax years after December 31, 2017, i.e., it is retroactive to 2018 for calendar-year taxpayers.
No changes to the definition of QIP were made through the CARES Act.
Taxpayers who placed QIP in service in 2018 or 2019 can adjust their returns to take advantage of the changes to QIP depreciation. The impact of taking 100% bonus depreciation on QIP could be significant to many taxpayers. In some cases, these change may create a net operating loss (NOL), which (you will learn in future blogs about the CARES Act) may create tax refunds bringing much needed liquidity to businesses challenged by the impact of COVID-19 pandemic.
It is likely that the IRS will provide guidance regarding how to claim the additional QIP depreciation, however the timing of that guidance is unknown. Currently we recommend taxpayers with unfiled 2019 tax returns, which may be impacted by this change, consider delaying filing until more information is available.
Absent official guidance, we anticipate taxpayers may have to amend their 2018 tax returns or file Form 3115, Application for Change in Accounting Method, with their 2019 returns if they haven’t already filed. The available options have nuances and should be discussed with your tax professional.
If you need help determining the tax impact of this change for your business or rental property,call on us. In the meantime, continue to visit our COVID-19 Tax Resource Center for up-to-date information on how the outbreak may affect your tax filing, payments, and planning. We encourage you to share the page with others. Through this unprecedented series of events, you can count on The Tax Warriors® at Drucker & Scaccetti to help.