Article written by:
Jeff Waldeck, CPA
Senior Manager, Tax & Business Advisory Services
Hannah Henderson, CPA
Senior, Tax & Business Advisory Services
Within the CARES Act, Congress addressed the much anticipated “restaurant/retail glitch” associated with the 2017 Tax Cuts and Jobs Act (TCJA). This rule previously prevented investments in Qualified Improvement Property (QIP) from qualifying for bonus depreciation. With the passing of the CARES Act on March 27, the recovery period for QIP is reduced from 39 years to 15 years, thus making it eligible for 100% bonus depreciation through 2022. This change is retroactive to January 1, 2018, forward.
What is considered eligible QIP?
Qualified improvement property is defined as an improvement to an interior portion of a building which is nonresidential real property if such improvement is placed in service after the date the building was first placed in service. Qualified improvement property specifically excludes expenditures attributable to the enlargement of the building, any elevator or escalator, or the internal structural framework of the building.
An addition to the definition of QIP within the CARES Act provides that improvement must be “made by the taxpayer.” With that, it is assumed that even if a building is new to a taxpayer, as long as the building had previously been placed in service by someone else, expenses made by the new taxpayer can be included as QIP.
What ways can taxpayers take advantage of this correction?
Under Rev. Proc. 2020-25, the IRS issued procedural guidance on three ways taxpayers can take advantage of the QIP correction on their tax returns for QIP placed in service after December 31, 2017, in the taxpayers’ 2018, 2019, or 2020 tax year.
- Filing an amended return for the 2018 or 2019 tax years
- Filing an Administrative Adjustment Request (AAR) under Sec. 6227
- Filing Form 3115, Application for Change in Accounting Method
Based on your specific facts and circumstances, each option should be reviewed to determine the best course of action to take. Furthermore, if accelerated deductions related to QIP creates or enhances a current year loss, such losses will be of value related to the new loss carryback provisions provided by the CARES Act.