Qualified Improvement Property QIP Adjustment | MR Valuation Consulting
CARES Act provides Immediate Cost Recove

Qualified Improvement Property (QIP)

Qualified Improvement Property (QIP)

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act, or CARES Act was signed into law.  Not only does the CARES Act provide relief to taxpayers affected by the novel coronavirus (COVID-19), but it also includes the long-awaited technical correction to the drafting error within the 2017 Tax Cuts and Jobs Act (TCJA).  This drafting error required taxpayers to depreciate Qualified Improvement Property (QIP) over 39 years, as opposed to 15 years.  This rendered the QIP ineligible for bonus depreciation.

 

The CARE Act designates:

  •  “Qualified Improvement Property” as 15-Year Property 

  •  “Qualified Improvement Property” is eligible for 100 percent Bonus Depreciation

 

The result of this technical correction will provide immediate current cash flow benefits and relief to taxpayers, especially those in the retail, restaurant, and hospitality industries.

Key Topics 

  • This amendment is retroactive to January 1, 2018, as if it was originally included in the 2017 TCJA

  • If an Alternative Depreciation System (ADS) is elected or required, the taxpayer must assign QIP a 20-year life and it is ineligible for Bonus Depreciation.

  • Taxpayers who elect out of the provisions of “Sec. 163(j) – Limitation on Business Interest Deduction” are required to utilize the Alternative Depreciation System for real estate assets.

  • Taxpayers that made the Real Property Trade or Business (RPTOB) election in 2018, the change to a 20-year ADS recovery period will impact the depreciation claimed under section 168(g)(8).

  • Consider state bonus depreciation decoupling implications (i.e. different depreciation expense between federal and state)

Refund Opportunities 

  • Taxpayers would be able to file amended returns for QIP placed in service in beginning in 2018 and ending in 2019 that have been filed prior to the enactment of the technical correction.  The method change is made by filing “Form 3115, Application for Change in Accounting Method”

  • Taxpayers that placed QIP into service in 2019 can claim 100 percent bonus depreciation prospectively on their 2019 tax return and should consider whether they should file Form 4466 to recover overpayments of estimated taxes.

What is Qualified Improvement Property (QIP)

Qualified Improvement Property is defined as “any improvement 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 in service by the taxpayer, but shall not include: 1) improvements attributable to the enlargement of the building; 2) an elevator or escalator; or 3) the internal structural framework of the building.  A cost segregation analysis should specifically identify typical non-structural improvements.  These improvements may include:

  • Internal HVAC assets

  • Ventilation systems

  • Plumbing elements

  • Energy management systems

  • Woodwork

  • Interior signage

  • Electrical elements

  • Lighting systems

  • Fire protection systems

  • Fire alarm systems

  • Restroom partitions

  • Doors

  • Permanent, non-load bearing walls

  • Oher structural components of common areas that are not load-bearing

CONTACT

CARE Act, Coronavirus and Qualified Improvement Property

The tax treatment of Qualified Improvement Property which includes Qualified Leasehold, restaurant and leasehold Improvement property was changed to qualify as 15-year property as a technical correction to the Tax Cut and Jobs Act of 2017(TCJA).

The classification as 15-year property (as opposed to 39-year property) makes these asset subject to 100% Bonus Depreciation deductions for many taxpayers.

The CARES Act adjusts the recovery period for QIP from 39 years to 15 years thus making it eligible for 100 percent bonus depreciation through 2022. This change is retroactive to January 1, 2018.

Got a question? Our team is available to answer any questions you may have.

Contact us to talk about options on how to maximize depreciation deductions on your capital improvements.

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