Since the Tax Cuts and Jobs Act (TCJA) was enacted near the end of 2017, there has been confusion amongst both tax preparers and property owners alike on the tax issues involved in making nonresidential property improvements. The intention of the act (TCJA) was to combine leasehold improvement property, retail improvement property, and restaurant property, under the title of “Qualified Improvement Property” and make it eligible for 15 year depreciation as well as for 100% first-year bonus depreciation. A drafting error in the text of the TCJA, unfortunately, resulted in the above-defined Qualified Improvement Property only qualifying for 39-year depreciation, also making it ineligible for 100% bonus depreciation.
The recently passed CARES Act has corrected that error. It included a retroactive technical correction, as if it were originally included within the TCJA. The CARES Act allows Qualified Improvement Property to qualify for 15-year depreciation and, therefore, 100% first-year bonus depreciation.
Now that this important correction has been made, it is important for property owners to make note of the following items when looking to maximize the tax benefits of putting in place Qualified Improvement Property:
- QIP is defined as “any improvement made by a taxpayer to an interior portion of a nonresidential building placed in service after the building was placed in service”
- This definition excludes expenditures for the enlargement of the building, elevators and escalators, or the building’s internal structural framework
- In order to qualify for bonus depreciation, the QIP must be new property in the hands of the taxpayer, not used property.
- QIP qualifies for 100% first-year bonus depreciation if it was acquired after 9/27/2017 and placed in service after 12/31/2017, in a tax year ending in 2018, 2019, or 2020.
- Taxpayers changing from 39-year depreciation to 15-year depreciation qualify for an automatic change in accounting method. This eliminates the need for additional reporting requirements in place with normal change of accounting method procedures.
- Taxpayers have until 10/15/2021 to file an amended return for the “placed in service” year of the QIP.
- Partnerships subject the partnership audit rules are granted special permission to file amended form 1065’s and K-1’s with respect the placed in service year.
- Taxpayers must also consider changes to taxable income or tax liability that come as a result of a depreciation adjustment to QIP.
- Taxpayers who elect out of the new business interest deduction limitation (under the TCJA) must depreciate QIP over a 20-year life, making it ineligible for 100% first year bonus depreciation.
Other Important Considerations:
Taking into consideration the adverse impact the current COVID-19 crisis has had on many individuals and business owners, it is important for taxpayers to consider amending 2018 tax returns in order to take advantage of the above changes to Qualified Improvement Property. This has the potential to result in significant tax savings and potential tax refunds. Corporate taxpayers may even be able to recognize additional benefits given the changes to Net Operating Loss carry backs also included within the CARES Act.
We will continue to follow these developments and will provide additional information as we receive clarification. These are very challenging times. Please know that LB Goodman & Co is here to help you with your financial questions and concerns.
If you have any questions, do not hesitate to contact us.
As of June 26 2020