CARES Act Provides Substantial Tax Deductions by Expanding Bonus Depreciation to “Qualified Improvement Property”
The law providing relief due to the COVID-19 pandemic contains a beneficial change in the tax rules for many improvements to interior parts of nonresidential buildings. This law change fixes errors in the Tax Cuts and Jobs Act (TCJA). In 2017 as part of the TCJA, Congress agreed to assign a 15-year recovery period for Qualified Improvement Property (QIP) making it eligible for 100% bonus depreciation. Due to a drafting error in the TCJA, Congress failed to assign a 15-year recovery period to QIP making it 39-year property and ineligible for 100% bonus depreciation. This oversight has been widely referred to as the “retail glitch.”
The Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law on March 27, 2020 and included a provision to fix the retail glitch. As an added benefit, the fix is retroactive and applies to QIP placed in service after December 31, 2017. Businesses can now treat QIP placed in service after December 31, 2017 as 15-year property. It is eligible for bonus depreciation, allowing taxpayers to deduct up to 100% of the cost of assets that are being depreciated over 39 years under the previous law. QIP is defined as any improvement made by the taxpayer to an interior portion of a building which is nonresidential real property, if such property was placed in service after the date the building was originally place in service. Unfortunately, improvements related to the enlargement of a building, any elevator or escalator, or the internal structural framework are specifically excluded from the definition of QIP.
In the current business climate, you may not be in a position to undertake new capital expenditures — even if they’re needed as a practical matter and even if the substitution of 100% bonus depreciation for a 39-year depreciation period significantly lowers the true cost of QIP. But it’s good to know that when you’re ready to undertake qualifying improvements that 100% bonus depreciation will be available.
Of more immediate interest, the retroactive nature of the CARES Act provision presents favorable opportunities for qualifying expenditures you’ve already made. Taxpayers can revisit documentation for 2018 and 2019 additions to identify QIP expenditures.
Recent IRS guidance allows taxpayers greater flexibility in how they can avail themselves of the benefits of the law change. Taxpayers have the option to amend their 2018 and 2019 tax returns and receive a tax refund. Alternately, they can file a change in accounting method with their 2019 or 2020 tax returns taking a “catch-up adjustment” on those tax returns. Furthermore, taxpayers can retroactively change to a 15-year recovery period and elect out of bonus depreciation for 2018 and 2019 to customize the benefit to fit their tax situation.
There are several ways to reap the benefits of the law change. We can assist taxpayers in identifying and quantifying the maximum amount of eligible QIP and provide analysis to navigate each taxpayer’s current tax situation to identify the most valuable approach to realizing the tax benefits of QIP.
If you have any questions about how you can take advantage of the QIP provision, don’t hesitate to contact us.