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Recent Qualified Improvement Property Guidance May Offer Benefits

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Before the 2020 Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law, Qualified Improvement Property (QIP) placed in service after December 31, 2017, was subject to a 39 year depreciable life, thus making it ineligible for a current deduction using bonus depreciation. While this was not the original intent of Congress, the oversight made it difficult for many taxpayers to receive immediate tax benefits from their leasehold improvements. QIP is generally defined as an improvement made to the interior portion of a nonresidential building any time after the building was placed in service. However, improvements related to the enlargement of a building, elevator, escalator or the internal structure do not qualify as QIP and are still required to be depreciated over 39 years.

The CARES Act, passed on March 27, now gives QIP a 15 year life and allows for 100% bonus depreciation, meaning the entire cost can be deducted in the year it is placed in service. In addition, this change is retroactive to QIP placed in service in 2018 and continues for QIP placed in service in 2019 and 2020. This creates an excellent opportunity to revisit prior year qualifying expenditures for which a tax return was already filed. The United States Treasury has recently provided guidance on how to implement this change and explains the options taxpayers have for their previously filed tax returns.

There are two options on how to retroactively make this change:

  • File an amended tax return. This is normally the more time consuming option. If the business is a flow through entity (S Corporation or Partnership), the underlying shareholder/member tax returns would also need to be amended. The IRS is often slow to process amended tax returns so any refund generated could be delayed.
  • File a change of accounting method with a current year return. For example, if the QIP was placed in service in tax year 2018, the depreciation would be “caught up” through an adjustment on the 2019 tax return. This would alleviate the administrative burden of filing amended tax returns.

The QIP change also brings further tax advantages under cost segregation studies. While cost segregation studies already may be advantageous for building improvements, the QIP change provides taxpayers with a strong incentive to revisit these studies. In a cost segregation study, costs incurred on the building improvement are identified and placed into different depreciable categories: five, seven, fifteen and thirty-nine year lives. Any costs identified in the first three “buckets”, which includes QIP, may be eligible for first year bonus depreciation.

The associated tax benefit from the QIP change under the CARES Act may be substantial. As always, please contact your Berntson Porter service team if you have any questions.

Berntson Porter is here to help you navigate these unprecedented times. Visit our online Resource Center for up-to-date information about COVID-19 legislation that impacts you and your business