The Tax Cuts & Jobs Act (TCJA) enacted in 2017 amended the tax code to consolidate multiple categories of improvement property to one single category called Qualified Improvement Property (QIP). Qualified Improvement Property is certain improvements made to the interior portion of a nonresidential real property building. Such improvements must be made after the building has initially been placed in service. Unfortunately, improvements related to the enlargement of a building, any elevator or escalator, or the internal structural framework is excluded from the definition of QIP.
The intention of TCJA was to assign a 15-year recover period to QIP, which would have meant it was eligible for 100% bonus depreciation. However, that specific recovery period failed to be reflected in the actual text of the TJCA resulting in QIP falling under the 39-year recovery period making it ineligible for 100% bonus depreciation.
The 2020 Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), which was signed into law on Mar. 27, 2020, corrects the TCJA drafting error for QIP. Therefore, most businesses are now allowed to claim 100% bonus depreciation for QIP if the above requirements are met. Additionally, this correction is retroactive, which means that QIP placed in service after Dec. 31, 2017 is eligible for the 15-year recovery period, and ultimately the 100% bonus depreciation. Taxpayers have two options when applying this correction retroactively:
- If the taxpayer filed only one tax return with the 39-year recovery period an amended return can be filed in order to correct the recovery period to 15-year with the option to elect 100% bonus depreciation.
- If multiple tax returns have been filed with the 39-year recovery period the taxpayer may choose to file Form 3115 “Application for Change in Accounting Method” in the current tax year to correct the prior years. Important to note that filing Form 3115 will only affect the taxable income of the current tax year in which the Form 3115 is filed, regardless of the year the change is applicable to.
This technical correction may result in tremendous accelerated tax savings for owners of nonresidential real property. Prior to this correction, taxpayers recouped the costs of improvements over 39 years. Now taxpayers have the ability to fully depreciate the improvements in a single tax year which may considerably reduce taxable income. As always, please consult with your tax advisor before making any changes to previous tax filings.