On March 27, 2020, the United States Congress passed, and the President signed the Coronavirus Aid, Relief and Economic Security Act (CARES Act). The Act provides significant tax reduction and liquidity improvement opportunities for commercial real estate owners and taxpayers in the hospitality, restaurant, and retail trades who have made improvements to their buildings since September 27, 2017.
What is Qualified Improvement Property?
The Tax Jobs Act of 2017 (TCJA) for the purpose of tax simplification created the category of Qualified Improvement Property (QIP) intended to consolidate the previous depreciation categories of Qualified Leased Hold Improvements, Qualified Retail Improvement Property, and Qualified Restaurant Property, each having similar but particular depreciation rules.
TCJA defined QIP as “improvements made by the taxpayer to the interior of a non-residential building, which was placed in service after the building was placed in service” (excluding building enlargements, structural components, and escalators/elevators). The TCJA intended that this new category would be assigned a 15-Year tax-life and thereby be eligible for 100% bonus depreciation, a boon for commercial real estate. Unfortunately, due to a drafting error, the final Act failed to assign a recovery period for QIP, and therefore it defaulted to a 39-year life without bonus eligibility.
The CARES Act’s Impact on Qualified Improvement Property
The CARES Act amends IRC Section 168(e)(3)(E), retroactively defining the depreciable life of QIP as 15-year property, and therefore 100% bonus eligible as initially intended by the TCJA. Taxpayers with QIP expenses in 2017 (after September 27), 2018, and/or 2019 can now retroactively claim the 100% deduction for those improvements. If these deductions result in a net operating loss (NOL), The CARES Act provides for carryback for each of the prior five tax years.
To claim QIP bonus deductions for improvements, the taxpayer may either have their corresponding tax return amended or file an Application for Change of Accounting Method, Form 3115.
Taxpayers with QIP should speak with their tax advisors for guidance on the need for a Cost Segregation Study to properly document the classification and value of these assets to safely maximize this tax-saving opportunity.
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