CARES Act Expands Bonus Depreciation to Qualified Improvement Property

by JD Lewis

Background

On December 22, 2017 the President signed into law the Tax Cuts and Jobs Act, commonly known as the TCJA. The TCJA modified Section 168 of the Internal Revenue Code to remove three existing property classifications: qualified leasehold, qualified restaurant, and qualified retail improvement property in an effort to consolidate much of what had been included in these separate classifications into one existing property classification: qualified improvement property “QIP”. Qualified improvement property was a relatively new asset classification created in 2015 under the PATH ACT. When drafting the TCJA, Congress presumably intended for QIP to be assigned a 15-year recovery period, and thus eligible for the newly expanded 100% bonus depreciation provisions. Unfortunately, due to an apparent drafting error, Congress failed to assign QIP a 15-year recovery period in the modified Section 168 rendering QIP ineligible for bonus depreciation. This oversight error has since been popularly dubbed the “Retail Glitch”.

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 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.

What’s New?

On Friday, March 27, 2020, the President signed into law the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Included in Sec. 2207 of the Cares Act are two significant changes to Section 168 of the Internal Revenue Code. First, qualified improvement property was specifically assigned a 15-year recovery period thus rendering QIP eligible for bonus depreciation. Second, the definition of qualified improvement property was modified to only include improvements “made by the taxpayer”. As a result, it can be inferred that improvements to a non-residential building acquired by a taxpayer, after having been previously placed in service by another taxpayer, will not meet the modified definition of QIP even if all other criteria are met.

Next Steps

The changes noted above are effective retroactively as of September 27, 2017. Taxpayers should consider evaluating any previous or upcoming capital projects which may now be eligible for more favorable tax treatment. While specific procedural guidance is expected, taxpayers generally have the option of amending previously filed returns or filing a Form 3115, Application For Change in Accounting Method, with either the 2019 or 2020 tax return to retroactively claim any missed deductions.

We can help

Please reach out to your Elliott Davis Tax Advisor for additional information. As always, we will continue to monitor and communicate any future legislative updates.

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The information provided in this communication is of a general nature and should not be considered professional advice.  You should not act upon the information provided without obtaining specific professional advice. The information above is subject to change as a result of rapidly evolving legislative developments and government guidance.