Those who were using the Qualified Improvement Property (QIP) classification for bonus depreciation should take note of changes brought by the Tax Cut and Jobs Act (TCJA).
Where We Were…
Qualified Improvement Property (QIP) isn’t entirely new. The 2015 PATH Act created qualified improvement property, which is “any improvement to an interior portion of a building that is nonresidential real property if the improvement is placed in service after the date the building was first placed in service.” Excluded from QIP is any enlargement to the building, improvements to escalators or elevators and internal structural framework. Under the 2015 PATH Act, QIP was eligible for bonus depreciation and depreciated over 39 years.
In addition to QIP, there was also qualified leasehold improvement property, qualified retail improvement property and qualified restaurant improvement property. These types of qualified improvements were generally eligible for bonus depreciation and depreciated over 15 years.
QIP opened up new doors for certain taxpayers who didn’t qualify under the three other improvement property types mentioned above. Companies who were leasing to related companies or who owned their own building could accelerate depreciation through bonus depreciation deductions on the improvements that qualified. QIP also removed the three-year wait period and no longer restricted the accelerated depreciation be limited to leased space; common spaces also qualified.
So What Changed with QIP?
Under the TCJA, the other three types of improvement property were removed and only the QIP classification was left for assets purchased after December 31, 2017. In removing the code sections related to the three previous types of improvement property (qualified leasehold, retail and restaurant), the TCJA neglected to also add in new code sections for QIP, which was interlinked with the old improvement property code sections.
The short of it means that qualified improvement property is no longer eligible for bonus depreciation and is depreciated over 39 years. A House Ways and Means spokesperson has commented that Joint Explanatory statement reflects the intent of the House and Senate, and the error will be addressed with technical corrections.
The TCJA did add that QIP is now eligible for Section 179 deduction, which is completely new for improvement property.
We are waiting for technical corrections to be made to match up the intention of the House and Senate to the laws for QIP, allowing the improvements to be depreciated over 15 years.
In the meantime, we recommend that you work with your CPA to estimate your taxable income under the current law. If you were able to previously use a 15-year life and bonus depreciation on improvements, you should plan for the 2018 impact to taxable income under the current 39 year life/no bonus depreciation rule in case a technical correction is not made. Work with your CPA to identify other opportunities to reduce taxable income as appropriate.
This article should not be construed as tax advice. Before making any decision that may affect you or your organization, consult a qualified tax advisor or contact Clark Nuber.
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