Wolters Kluwer Tax & Accounting looks at the correction the CARES Act made to the treatment of qualified improvement property.
Restaurants, retailers and other lessees can now rapidly expense improvements for tax purposes
A known error in the legislative language of the Tax Cuts and Jobs Act (TCJA) for Qualified Improvement Property (QIP) was recently amended. The QIP, which includes leasehold improvements, retail improvements, and restaurant property, had previously qualified for 15-year depreciation but the TCJA had accidently recategorized QIP as requiring 39-year depreciation. More than two years after the error was made in TCJA, the CARES Act (Coronavirus Aid, Relief, and Economic Security Act) finally corrected it, restoring the 15-year depreciation and making QIP eligible for bonus depreciation retroactive to January 1, 2018.
Taxpayers who made qualifying improvements in 2018 can now go back and claim 15-year depreciation or 100 percent first-year bonus depreciation in 2018. Taxpayers who had already filed 2019 tax returns prior to enactment of the CARES Act can do the same for 2019. Taxpayers who had not yet filed 2019 tax returns can claim 15-year depreciation or 100 percent first-year bonus depreciation on 2019 qualifying improvements.
- QIP includes any improvement made by the taxpayer to an interior portion of a nonresidential building placed in service after the building was placed in service, excluding expenditures for enlargement of the building, elevators and escalators, or the building’s internal structural framework
- QIP can include roofs, heating and air conditioning equipment, and fire protection and security equipment
- QIP under the Alternative Depreciation System has a 20-year recovery period
- QIP property qualifies for 100 percent first-year bonus depreciation if it was acquired after September 27, 2017 and placed in service after December 31, 2017
- 100 percent bonus depreciation starts to phase-down in 2023
- An amended return for 2018 or 2019 may be filed no later than October 15, 2021, but in no event later than the end of the statute of limitations for assessment of tax for the tax year for which the amended return is being filed
- Partnerships subject to the partnership audit rules are given special permission to file amended Form 1065s and K-1s
- A taxpayer may alternatively file a Form 3115 Change of Accounting Method with a timely filed federal tax return
- Changing to 100 percent bonus depreciation may help generate net operating losses for 2018, 2019 or 2020 which may enable a taxpayer to utilize the five-year net operating loss carryback provisions of the CARES Act, potentially producing rapid tax refunds
- A real property trade or business that elected out of restrictions on business interest deductions may not be able to utilize 100 percent bonus depreciation
- Increasing first-year bonus depreciation may also have an adverse effect on other deductions available under the Tax Code
Tax expert Mark Luscombe, JD, LL.M, CPA, Principal Federal Tax Analyst at Wolters Kluwer Tax & Accounting, can help explain the new options available for Qualified Improvement Property.
To arrange interviews with Mark Luscombe or other federal and state tax experts from Wolters Kluwer Tax & Accounting on this or any other tax-related topics, please contact:
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