States Respond to Qualified Improvement Property Depreciation Change

Many states automatically conform to the CARES Act correction reducing the MACRS recovery period of qualified improvement property from 39 years to 15 years. The correction made the property eligible for federal bonus depreciation.

Several conforming states released income tax guidance or passed legislation decoupling from the bonus depreciation provisions. Other states have not conformed to the CARES Act, including the qualified improvement property provisions.

Qualified Improvement Property Changes

Qualified improvement property (QIP) is an internal improvement to nonresidential real property. QIP was removed as a separate category of bonus depreciation property by the Tax Cuts and Jobs Act (P.L. 115-97). This “retail glitch” in the Tax Cuts and Jobs Act (TCJA) resulted in qualified improvement property being removed as a separate category of bonus depreciation.

The federal Coronavirus Aid, Relief, and Economic Security Act (CARES Act) provided a technical correction changing the recovery period from 39 to 15 years for QIP placed in service after 2017. This change allows QIP to be retroactively eligible for the federal bonus depreciation deduction. Bonus depreciation is allowed for qualified property with a recovery period under the Modified Accelerate Cost Recovery System (MACRS) of 20 years of less.

State Income Tax Treatment of QIP

How a state treats QIP property may depend on if the state:

• conforms to the federal TCJA, including the “retail glitch;”
• conforms to the federal CARES Act; and
• decouples from bonus depreciation.

Does State Conform to TCJA?

States conforming to the TCJA also conformed to the language removing bonus depreciation for QIP.

Nonconforming states, like California, were not impacted because they do not conform to MACRS depreciation anyway.

Does State Conform to CARES Act?

If a state conforms to the federal changes reducing the MACRS recovery period of QIP from 39 years to 15 years may depend on the state’s adoption of the CARES Act. Alternatively, there are states which have not conformed to the CARES Act but have separately adopted the provision changing the depreciable life of QIP to 15 years.

Does State Decouple from Bonus Depreciation?

Even if a state conforms to the CARES Act or has otherwise adopted the QIP 15-year recovery period, it may specifically decouple from federal bonus depreciation provisions. Accordingly, QIP may be subject to that state’s depreciation rules based on the applicable federal recovery period.

Several states issued guidance or passed legislation about their treatment of QIP.

• Connecticut adopts changes made to depreciation of QIP, except it does not allow IRC Sec. 168(k) bonus depreciation. Taxpayers computing Connecticut corporation business or personal income tax liability must addback any federal bonus depreciation deduction for QIP.
• Georgia adopts 15-year amortization for QIP, but does not adopt bonus depreciation, for tax years after 2018.
• Iowa does not conform with the federal treatment of QIP placed in service during tax years 2018 and 2019 and treats QIP as 39-year property. Bonus depreciation is not allowed for Iowa tax purposes for any tax year.
• Maryland conforms to the classification of QIP as 15-year property for tax years beginning after 2017. However, Maryland decoupled from federal bonus depreciation, so non-manufacturer taxpayers are not allowed to take bonus depreciation on QIP.
• Massachusetts adopts the changes to QIP allowing a 15-year depreciable life, but it does not allow IRC Sec. 168(k) bonus depreciation. Taxpayers computing Massachusetts corporate excise tax must addback any federal bonus depreciation deduction for QIP. Personal income taxpayers claiming a depreciation deduction from Massachusetts business income must exclude bonus depreciation.
• Tennessee excise tax law conforms to the depreciation of qualified improvement property over 15 years. However, bonus depreciation is not allowed for excise tax purposes.
• Wisconsin generally requires depreciation and amortization to be computed under the IRC as in effect on January 1, 2014. However, Wisconsin has conformed to the CARES Act amendment providing a 15-year recovery period for qualified improvement property.

What Should Taxpayers Do Now?

Because the change is retroactive, taxpayers who placed QIP in service in 2018 or 2019 and did not claim bonus depreciation or use the 15-year recovery period on their federal returns should either:

• file an amended federal return; or
• make an application for a change in accounting.

Amended state tax returns may need to be filed as well.

By Tralawney Trueblood, J.D., M.B.A.

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