The CARES Act Update: Qualified Improvement Property

Please note: This blog is current to the date of its publication, Wednesday, Sept. 23. For additional updates or assistance navigating these uncertain times, please contact us or visit our SST COVID-19 resource page.

The Coronavirus Aid, Relief and Economic Security (CARES) Act resolved a prior issue, referred to as the “retail glitch,” which occurred under the Tax Cuts and Jobs Act (TCJA) of 2017.

The glitch: Qualified Improvement Property (QIP) did not qualify for bonus depreciation.

The passing of the CARES Act qualified certain interior improvements made to nonresidential real property, also known as QIP, for the expanded bonus depreciation provisions in the 2017 law.

The TCJA expanded bonus depreciation rules to allow a 100% write-off for certain property acquired and placed in service after Sept. 27, 2017, and before Jan. 1, 2023. Unfortunately, another provision of the TCJA reclassified many interior improvements to nonresidential buildings in a way that made them ineligible for this treatment.

Historically, many interior improvements to nonresidential buildings were eligible for bonus depreciation as QIP before the enactment of the TCJA. Unfortunately, the TCJA eliminated the separate asset categories for qualified leasehold improvements, qualified restaurant property and qualified retail improvement property, essentially lumping them into one QIP category. Because of this drafting error, legislators excluded QIP from any bonus depreciation eligibility.

Because the CARES Act changed depreciable life of QIP from 39 to 15 years, the error has been corrected and QIP is now bonus eligible. These changes are retroactive as if they were always a part of the TCJA.

How do you take advantage of this change?

The new bonus depreciation can be taken not only currently on QIP assets, but taxpayers can also file amended returns for affected prior years to capture the appropriate amount of depreciation deductions in the applicable year. Taxpayers can also use Form 3115, Application for Change in Accounting Method (using Code 7 if the asset is still in use/Code 107 if it has been disposed of), to basically play catch up on depreciation that should have been captured in prior years.

Taxpayers should consult with their tax advisors to determine which of these options are best suited to their specific situations. For more information or additional guidance, contact the experts at SST today.

Special thanks to SST Senior Tax Manager Rachel Alexander for providing the content for this post. Click here to learn more about Rachel.