The Quick Tax Fix for Qualified Improvement Property

At long last, the Coronavirus Aid, Relief and Economic Security (CARES) Act fixes a glitch in the tax rules for deductions for “qualified improvement property” (QIP). The change, which some tax commentators have been calling for since the Tax Cuts and Jobs Act (TCJA) was enacted in 2017, is retroactive to 2018.

May 19th 2020
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At long last, the Coronavirus Aid, Relief and Economic Security (CARES) Act fixes a glitch in the tax rules for deductions for “qualified improvement property” (QIP). The change, which some tax commentators have calling for since the Tax Cuts and Jobs Act (TCJA) was enacted in 2017, is retroactive to 2018.

The new CARES Act provision on QIP is particularly noteworthy for taxpayers in the real estate, restaurant, retail and hospitality businesses. These businesses have been hit hard by the COVID-19 pandemic.

Background information: Initially, QIP was defined by the Protecting Americans from Tax Hikes (PATH) Act of 2015. It included any improvement to an interior portion of a nonresidential real estate if the improvement was placed in service after the date the building was placed in service. But the definition excluded the enlargement of a building, any elevator or escalator and the internal structural framework of a building.

Under the rules existing at that time, other similar types of property included qualified leasehold improvements, qualified retail improvements and qualified restaurant property. However, the TCJA eliminated these other asset categories and established QIP as the sole remaining asset category for such improvements.

Key point: Congress intended QIP to have a 15-year recovery period. Therefore, it would be eligible for the first-year bonus depreciation deduction for assets with a cost recovery period of 20 years or less. Best of all, under the TCJA, the bonus depreciation percentage was doubled from 50 to 100 percent for qualified property placed in service after September 27, 2017 and before January 1, 2023.

Beginning in 2023, bonus depreciation will be gradually phased out over a five-year period. Currently, the bonus depreciation tax break is scheduled to disappear after 2026.

However, due to a drafting error by lawmakers, no recovery period was assigned to QIP. Therefore, it defaulted to a 39-year recovery period based on regular depreciation rules. End result: QIP wasn’t eligible for bonus depreciation.

The CARES Act provides the “fix” taxpayers have been looking for. Notably, it assigns a 15-year cost recovery period to QIP. Voila, QIP is eligible for bonus depreciation! The change is effective as it if were made as part of the TCJA in the first place. In addition, the CARES Act makes other technical adjustments corresponding to this tax provision.

Based on these changes, qualified businesses may file an amended tax return for the 2018 and/or 2019 tax years, as well as benefitting from the new rules on a 2019 tax return not yet filed or the one for the 2020 tax year. Furthermore, the CARES Act provision is expected to have a significant impact on cost segregation studies establishing depreciation deductions for buildings.

Do you have clients affected by them CARES Act? If you have not done so already, contact them immediately to discuss the tax-saving possibilities.

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