One of the most notable provisions within Coronavirus Aid, Relief, and Economic Security (CARES) Act makes Qualified Improvement Property eligible for bonus depreciation. While this provision isn’t directly related to COVID-19, it’s a way for businesses to relieve some of their financial strain during this challenging time.
Why is this change in the CARES Act?
Before 2017, improvements made to nonresidential property fell into one of three categories: qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property.
The Tax Cuts and Jobs Act (TCJA) of 2017 created a new, consolidated category for these properties called qualified improvement property (QIP). The TCJA intended to make all QIP eligible for bonus depreciation. However, there was an error – QIPs were given a 39-year life instead of a 15-year life. This error, which made QIP ineligible for the deduction, is known as the retail glitch.
The CARES Act fixes the retail glitch, giving QIP a 15-year life and making it eligible for bonus depreciation.
What’s qualified improvement property?
QIP is an improvement made to the interior portion of a building. It doesn’t include enlarging the building, elevators or escalators, or updating any internal structural framework.
As the taxpayer, you can only make improvements to nonresidential property. And, you have to make the improvements after the building is placed into service.
QIPs aren’t eligible for bonus depreciation if you previously elected out of bonus depreciation. They’re also not eligible if you made the “real property trade or business” election. But, per Revenue Procedure 2020-25, you can revoke previously made elections for bonus depreciation and “real property trade or business” by filing an amended return or Form 3115.
What’s bonus depreciation?
Bonus depreciation gives businesses the ability to speed up the depreciation of an asset and take a greater deduction in the first year property is placed into service. Businesses can continue to deduct a percentage of the cost of property in the following years. For the 2018 and 2019 tax years, businesses can deduct 100% of an asset in the first year.
Section 179 is similar to bonus depreciation, but it’s slightly different. It has its own limitations and requirements. This tax code allows businesses to save on the cost of equipment and property purchases by deducting the full price of an item in the current tax year.
Why is this change important?
This change provides real estate, retail, and hospitality businesses with an opportunity for significant and immediate tax savings. You can take advantage of this provision if you have QIP eligible for bonus depreciation, even if it was put into place in a previous year. The change is retroactive to Jan. 1, 2018.
If you place properties into service in 2018 and haven’t filed a 2019 tax return, you can file an amended return or Form 3115 to correct this. If you placed properties into service in 2018 and have filed a 2019 tax return, you will have to file Form 3115 to correct this.
Tax professionals can help you determine if you have QIP eligible for this deduction, as well as the next steps to take. They can also analyze and calculate your tax savings.
Have questions about qualified improvement property? Let’s talk!