The Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) fixes the retail glitch and once again makes qualified improvement property (QIP) eligible for bonus depreciation.
The CARES Act treats qualified improvement property (QIP) as 15-year property and thus, allows taxpayers to apply 100% bonus depreciation to eligible QIP. The Act also changes the ADS recovery period for QIP to 20 years and provides that the taxpayer must make the improvements. The changes apply retroactively to property placed in service in 2018.
The Protecting Americans from Tax Hikes Act of 2015 originally added the definition of QIP and allowed taxpayers to treat QIP as 39-year property eligible for bonus depreciation. The bill known as the Tax Cuts and Jobs Act (TCJA) eliminated three nonresidential real property categories (qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property) and replaced these categories with a broader category, QIP. The drafters of TCJA removed QIP from the listing of assets included in the definition of qualified property eligible for bonus depreciation. The legislative history for TCJA indicates that Congress intended for QIP to have a 15-year recovery period and thus, continue to meet the requirements for qualified property eligible for bonus depreciation. The final statute, however, did not reflect this intent and QIP, as 39-year property, became ineligible for bonus depreciation after Dec. 31, 2017. Despite the legislative history, the IRS and Treasury concluded that a technical correction needed to occur to allow for QIP to become bonus eligible and issued final regulations forbidding the application of bonus depreciation to QIP. With the passage of the CARES Act, QIP once again qualifies for bonus depreciation. QIP, as modified by the CARES Act, includes any improvement made by the taxpayer to an interior portion of a building which is nonresidential real property if such improvement is placed in service after the date such building was first placed into service. QIP does not include any improvement for which the expenditure is attributable to the enlargement of the building, any elevator or escalator, or the internal structural framework of the building
Implementing the change
For a taxpayer’s 2019 tax return or equivalent current fiscal year return, a taxpayer may generally apply bonus depreciation to QIP or a 20-year ADS recovery period to QIP placed in service during the taxable year. For taxpayers that have already filed their 2019 tax return or current fiscal year return, the taxpayer may file a superseding return or file an amended return to take into account the favorable rules related to QIP placed in service in that taxable year. Alternatively, taxpayers that have already filed their 2019 tax return or current fiscal year return may seek to file a Form 3115, Application for Change in Accounting Method, with their next tax return.
For QIP placed in service in 2018 or the equivalent prior fiscal year for which a taxpayer has already file its tax return, taxpayers need procedural guidance from the IRS and Treasury to retroactively apply bonus depreciation to QIP or use a 20-year ADS recovery period. In prior years, when Congress has retroactively extended bonus depreciation or when the IRS and Treasury issued new proposed bonus regulations, the IRS issued guidance that generally allowed taxpayers to either file an amended return or for a limited amount of time, file a Form 3115 (DCN 7 – Change from Impermissible to Permissible Method of Accounting). Based on this history, as taxpayers await procedural guidance from the IRS related to the retroactive application of bonus to QIP and the change in the ADS recovery period, taxpayers may want to begin planning based on the reasonable assumption that the IRS may provide similar procedural guidance.
Any planning related to QIP must also consider the recent changes to net operating loss (NOL) provisions by the CARES Act (CARES Act delivers five-year NOL carryback to aid corporations). Notably, the CARES Act provides that for losses arising in 2018, 2019 and 2020, such loss shall be an NOL carryback to each of the prior five taxable years, including tax years with higher tax rates. The application of bonus depreciation to QIP may have a significant impact on the NOLs of many taxpayers during the COVID-19 pandemic.
Takeaways: The new provisions related to QIP can substantially help taxpayers reduce taxes, increase liquidity and may generate carryback claims to tax years with higher tax rates. For questions related to this alert, please reach out to a RSM professional to discuss.
Tracy Watkins, WNT/Washington, DC (202) 370-8195
Christian Wood, WNT / Washington, DC (202) 370-8218
Warren Kitchens – West Region / Los Angeles, CA (770) 378-9330
Brad Westrum – Central Region / Minneapolis, MN (612) 455-9728
John Lincoln – Great Lakes Region / Chicago, IL (312) 634-3199
Dan McGrath – Great Lakes Region / Chicago, IL (630) 841-9796
Chris Atwell – Southeast Region / Baltimore, MD (240) 535-4044
Jason Belbot – Southeast Region / Baltimore, MD (410) 246-9294
Kevin Mowatt – Northeast Region / New York, NY (212) 372-1698