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Qualified Improvement Property and CARES Act

The CARES Act corrected a major TCJA drafting error, reclassifying Qualified Improvement Property from 39-year to 15-year life and making it eligible for 100% bonus depreciation — retroactive to 2018. For taxpayers, especially in retail, restaurant, and hospitality, this opens the door to significant refund opportunities and immediate cash flow relief.

CARES Act impact on Qualified Improvement Property and Bonus Depreciation

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 instead of 15 years.  This rendered the QIP ineligible for bonus depreciation.

 

The CARES 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 initially 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 from the provisions of “Sec. 163(j) – Limitation on Business Interest Deduction” must utilize the Alternative Depreciation System for real estate assets.

  • For 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 expenses between federal and state)

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Refund Opportunities 

  • Taxpayers could file amended returns for QIP placed in service beginning in 2018 and ending in 2019 that have been filed before 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 prospectively claim 100 percent bonus depreciation on their 2019 tax return and should consider whether they should file Form 4466 to recover overpayments of estimated taxes.

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What is Qualified Improvement Property (QIP)

Qualified Improvement Property is defined as “any improvement to an interior portion of a building, which is a nonresidential real property if such improvement is placed in service after the date such building was first established 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

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

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