Qualified Improvement Property Eligible for Bonus Depreciation

Posted on Jun 9, 2020 in Qualified Improvement Property

By Anshu Gupta, CPA and Rene Schaefer, CPA, MST

The CARES Act provided a technical correction for Qualified Improvement Property (QIP) that enables taxpayers to claim 100% bonus depreciation on eligible improvements. This change was made retroactive to property placed in service on or after January 1, 2018.

About the Provision

After the Tax Cuts and Jobs Act (TCJA), the various pre-existing categories (qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property) were replaced with one category called Qualified Improvement Property (QIP). The tax law change had intended for QIP to be classified as 15-year life property, eligible for 100% bonus depreciation. However, it was erroneously classified as 39-year depreciable property, which made it ineligible for bonus depreciation.

Correction

The CARES Act provided a technical correction for QIP, allowing taxpayers to claim 100% bonus depreciation. QIP is now classified as 15-year property for depreciation purposes. The CARES Act also amended the definition of “qualified improvement property” to clarify the improvements must be made by the taxpayer to qualify. This provision is applicable to qualified improvements placed in service on or after January 1, 2018, which makes it eligible for 100% bonus depreciation through 2022.

Please note many states do not confirm to bonus depreciation and require 39-year tax life for QIP.

What is QIP?

QIP is any improvement made by the taxpayer to an interior portion of a building that is non-residential real property and is placed in service after the building was first placed in service. It does not include expenditures for the enlargement of a building, an elevator or escalator, or the internal structural framework of a building.

How to Make the Correction

Taxpayers can correct QIP for 2018 and 2019 already filed tax returns in two different ways:

They can file an amended return (or an administrative adjustment request (AAR) for partnerships) to correct the recovery period from 39-year to 15-year for 2018 and 2019 returns and claim 100% bonus depreciation.
They can also correct QIP by filing an automatic accounting method change on Form 3115 (rather than amending returns) and claim the adjustment for the difference between the 100% bonus depreciation deduction and the depreciation originally claimed. This adjustment is taken for the year the Form 3115 is filed rather than for the year QIP was placed in service.

How this Correction can Help You

Taxpayers can take advantage of claiming 100% bonus depreciation for QIP placed in service on or after January 1, 2018. This will allow them to decrease their taxable income or increase a net operating loss, which can now be carried back five years. Both will increase cash flow with the potential tax savings.

Please contact your Clark Nuber professional to help you consider if this change is beneficial to you and your business.

Anshu Gupta is a senior in Clark Nuber’s Tax Services Group.

This article or blog contains general information only and should not be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services. Before making any decision or taking any action, you should engage a qualified professional advisor.