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The law providing relief due to the COVID-19 pandemic contains a beneficial change in tax rules for many improvements to interior parts of nonresidential buildings. It is known as qualified improvement property (QIP). When the Tax Cuts and Jobs Act (TCJA) came into play, any QIP placed in service after December 31, 2017, wasn’t considered eligible for 100% bonus depreciation, and the cost of QIP had to be deducted over a 39-year period rather than entirely in the year the QIP was placed in service. This was an inadvertent drafting mistake made by Congress and hasn’t been corrected until now.
The CARES Act was signed into law on March 27, 2020. It allows most businesses to claim 100% bonus depreciation for QIP, as long as certain other requirements are met. The correction is retroactive, and it goes back to apply to any QIP placed in service after December 31, 2017, but improvements related to the enlargement of a building, any elevator or escalator, or the internal structural framework continue to not qualify under the definition of QIP.
With the current economy, you may not be in a position to undertake new capital expenditures — even if they are needed as a practical matter and even if the substitution of 100% bonus depreciation for a 39-year depreciation period significantly lowers the actual cost of QIP. But keeping in mind when you are ready to undertake qualifying improvements, 100% bonus depreciation will be available.
The retroactive nature of the CARES Act provision presents favorable opportunities for qualifying expenditures you’ve already made. We can revisit and add to the documentation that you’ve already provided to identify QIP expenditures.
For not-yet-filed tax returns, we can simply reflect the favorable treatment for QIP on the return.
If you’ve already filed returns that didn’t claim 100% bonus depreciation for what might be QIP, we can investigate based on available documentation as discussed above. We will evaluate what your options are under Revenue Procedure 2020-25, just released by the IRS.
If you have any questions about how you can take advantage of the QIP provision, don’t hesitate to call us at 949-860-9892 or click here to contact us.