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Depreciation Changes Under CARES Act Qualified Improvement Property

Understanding Qualified Improvement Property Depreciation Changes

Nevertheless, IRS and Treasury have explicitly stated in final regulations on TCJA bonus depreciation that they lack the authority to change this glitch through administrative means. There have been murmurs in Congress that a fix is on its way, and that it has bipartisan support, but it remains to be seen if and when this legislation will come to a vote. IRS and Treasury have explicitly stated in final regulations on TCJA bonus depreciation that they lack the authority to change this glitch through administrative means. A focus on a targeted message and the right marketing methods can help tax and accounting firms meet strategic goals. States conforming to the TCJA also conformed to the language removing bonus depreciation for QIP.

  • Figure 2 illustrates this for a $100 investment in a property that is not eligible for 100 percent bonus depreciation.
  • Taxpayers who placed QIP in service in 2018 or 2019 can adjust their returns to take advantage of the changes to QIP depreciation.
  • Many companies made this election to get around the interest limitations under 163and maximize their business interest expense.
  • Many states do not allow for bonus depreciation so although a significant deduction may be available for federal tax return purposes, state income addbacks may be required and as a result generate unintended tax consequences.

It is likely that the IRS will provide guidance regarding how to claim the additional QIP depreciation, however the timing of that guidance is unknown. Currently we recommend taxpayers with unfiled 2019 tax returns, which may be impacted by this change, consider delaying filing until more information is available. The CARES act makes technical amendment to TCJA to change the depreciable life of QIP from 39 years to 15 years for improvements made by the taxpayer, thus specifically making QIP eligible for 100% bonus depreciation.

Origin of the QIP asset class

A notable feature of QIP, however, was that it did not have a cost recovery period of 15 years; for QIP to be recovered over a 15-year period, it had to also meet the definition of one of the other three types of improvement property. This means that in some instances, QIP may have qualified for bonus depreciation, but the remaining basis would have been depreciated over a 39-year period. This created complexity across different categories and definitions of improvement property. However, seemingly due to legislative oversight, the law accidentally excluded the category of improvement property investment from 100 percent bonus depreciation. As a result, investments of this type face a higher tax burden than under prior law.

  • It must be placed in service after the building was first placed in service and can include no improvements for the enlargement of the building, for elevators or escalators, or for the internal structural framework of the building.
  • With the increased threshold for deductions, prior decisions as it relates to these provisions should be reassessed to determine if they are still the most favorable under the new law changes.
  • $84.38$100.00$42.12Had the definitions of improvement property not been consolidated, investments in qualified improvement property would have been eligible for 100 percent bonus depreciation as they were for bonus depreciation under prior law.
  • One such example is taxpayers that have elected to be real property trades or businesses (“RPToBs”) in order to be exempt from the business interest limitation under IRC Sec. 163.
  • Prior to the TCJA, non-residential improvements were classified as either Qualified Leasehold Improvements, Qualified Restaurant Property, or Qualified Retail Improvement Property.

While likely useful to a broad base of taxpayers, the incentive was seen as a particularly meaningful boon to the retail, restaurant and hospitality industries because of the rate at which these businesses open and renovate locations. Due to a drafting error, QIP was not explicitly included in the definition of 15-year property in Section 168, nor was it specifically included as “qualified property” in Section 168 when the Tax Cuts and Jobs Act was enacted. To the frustration of taxpayers, Treasury and the IRS consistently held they had no authority to correct these omissions, and until a legislative fix was made, QIP would remain 39-year property and thus ineligible for bonus depreciation.

What Should Taxpayers Do Now?

This recovery period is effective for eligible property placed in service after Dec. 31, 2017. The new law increases the bonus depreciation percentage from 50 percent to 100 percent for qualified property acquired and placed in service after Sept. 27, 2017, and before Jan. 1, 2023. The bonus depreciation percentage for qualified property that a taxpayer acquired before Sept. 28, 2017, and placed in service before Jan. 1, 2018, remains at 50 percent. While the pandemic is causing a lot of grief and uncertainty, the technical correction on qualified improvement property is well-received. Taxpayers should review their depreciation schedule and discuss with their tax advisor to get the most benefits in a time when it is needed most. For property placed in service after 2017, due to an oversight in drafting the TCJA, real estate qualified improvement property was not included in the list of 15-year property — even though Congress intended for such property to have a 15-year depreciation period. For real estate qualified improvement property that was acquired and placed in service between September 28, 2017, and December 31, 2017, 100% first-year bonus depreciation was allowed.

Because bonus depreciation and Section 179 deductions reduce your taxable income and QBI, these tax breaks can potentially reduce your allowable QBI deduction. Depreciation breaks are just a matter of timing; the total deductions stay the same over the life of the asset. But the QBI deduction is a use-it-or-lose-it tax break that will expire at the end of 2025 unless Congress extends it, so you should take every opportunity to maximize it. The TCJA allows 100% first-year bonus depreciation for eligible property placed in service between September 28, 2017, and December 31, 2022. That means you can write off the entire cost of eligible property in the first year it’s placed in service.

How Qualified Improvement Property Changes Can Create Cash Flow Benefits

When 2023 hits, the amount of bonus depreciation will decrease by 20% per year until the end of 2026. Qualified improvement property, which now includes restaurant and retail improvements, as well as tenant and building improvements, has been added as eligible property.

Does QIP take bonus depreciation?

Therefore, QIP placed in service after 2017 can qualify for bonus depreciation. If the taxpayer elects out of bonus depreciation for QIP, it is depreciated straight line over a 15-year recovery period (Sec. 168(b)(3)(G)).

Under the old Qualified Leasehold Improvement test a property had to be in service for three years before the improvements were made in order to qualify. The new rules do not include this three year window, instead they simply require that the asset be placed in service after the building is placed in service. One thing worth noting about this change is that the original placed in service date of the building does not have to be by the current owner. While the improvements need to be made by the current owner in order to qualify, they can install them in an existing building that they just acquired. For example, a taxpayer can purchase an existing building and immediately start a renovation. The portions of the renovation that meet the requirements will qualify for the expanded bonus depreciation rules.

Qualified Improvement Property (QIP): A Technical Fix from the CARES Act

The “50% bonus depreciation” was to be phased down to 40% for property placed in service in calendar year 2018, 40% in 2019 and 0% in 2020 and afterward. Under the U.S. tax code, businesses can generally deduct their ordinary business costs when figuring their income for income tax purposes.

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The new law keeps the general recovery periods of 39 years for nonresidential real property and 27.5 years for residential rental property. But, the new law changes the alternative depreciation system recovery period for residential rental property from 40 years to 30 years. Qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property are no longer separately defined and no longer have a 15-year recovery period under the new law. However, cost segregation studies can still help to identify personal property still eligible for bonus depreciation.

Tax Data

For those taxpayers who have QIP that would otherwise qualify for bonus depreciation and who are limited from taking 179 expensing, there are a few options. The first option is to track property and designate it as QIP in fixed asset listings. In Understanding Qualified Improvement Property Depreciation Changes the event of a technical correction, it’ll be likely that an automatic consent change in accounting method will be made available to allow you to go back and claim the additional depreciation deductions via a 481 adjustment or amended return.

Understanding Qualified Improvement Property Depreciation Changes

The IRS has given beneficial tax treatment to QIPs, or their earlier tax forerunners such as Qualified Leasehold Improvements , since 2002. It was Congress’s intention https://accounting-services.net/ that under the Tax Cuts and Jobs Act , QIPs placed in service starting in 2018 were to be treated as 15-year property, and benefit from 100 percent Bonus Depreciation.

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