By Dustin Cutlip
The term Qualified Improvement Property, commonly known as ‘QIP’, originated with simplification in mind. However, through the years its application has been anything but simple.
Background and Definition
The Qualified Improvement Property classification was created as part of the PATH Act of 2015 as a combination and / or replacement to the old Leasehold Improvement Property, Retail Improvement Property, and Restaurant Property asset classifications. Qualified Improvement Property assets placed in service on or after January 1, 2016 were subject to a 15-year recovery life and eligible for accelerated bonus depreciation.
Qualified Improvement Property is defined as any improvement to an interior portion of a building which is non-residential real property, if such improvement is placed in service after the date such building was placed in service. There is no requirement that the improvement be pursuant to a lease and the improvements can be made to common areas of a building that are used by all tenants. However, Qualified Improvement Property does not include improvements attributable to building enlargements, internal structural framework or elevators / escalators.
Due to a drafting error in the Tax Cuts and Jobs Act of 2017 (‘TCJA’) the 15-year recovery life was not applied to Qualified Improvement Property. As a result, Qualified Improvement Property placed in service after December 31, 2017 became subject to a 39-year recovery life and was no longer eligible for accelerated bonus depreciation. It was widely known this was not the legislative intent of TCJA, but unfortunately that is how the law was written and applied.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020 finally issued the technical correction to the Qualified Improvement Property definition that we were all waiting for. This correction retroactively reinstated the 15-year recovery life and eligibility for accelerated bonus depreciation for Qualified Improvement Property placed in service after December 31, 2017.
It is important to note that this taxpayer favorable adjustment to recovery life (from 39 years to 15 years) is not an optional change, it is required. Once the CARES Act was signed into law the 39-year recovery life for Qualified Improvement Property became an improper accounting method.
Call to Action
As a result, Taxpayers who have 39-year Qualified Improvement Property on their depreciation schedule need to take corrective action for tax years 2018 and 2019. Luckily, the IRS has provided some flexibility to make these corrections through the following options:
- Filing an amended return(s)
- Filing a change of accounting method – This would account for the change in the current year, rather than having to amend prior year tax returns.
- Filing an Administrative Adjustment Request
It is important to note that a change in depreciation expense will likely interplay with other legislative changes under the TCJA and CARES Act, such as (but not limited to) business interest expense deductions, net operating loss rules, and excess business loss limitations. There is no one size fits all choice for Taxpayers. Careful consideration should be given to select a corrective method that will yield the most favorable tax outcome for your situation.
Please contact your Snyder Cohn advisor for more information on how these changes may affect your tax situation!