What is Qualified Leasehold Improvement Property?

Increased first-year depreciation deduction from 50% to 100% for eligible property acquired and placed in service after September 27, 2017 and before January 1, 2023. Of course, if the transferor claimed bonus depreciation on the QIP, its basis would be zero, so the transferee would have no basis in that QIP. By amending the 2018 return , corporations can claim bonus depreciation for QIP placed in service in 2018. By reducing 2018 income, this may generate an NOL for 2018, which under the CARES Act can be carried back five years to when the corporate tax rate was 35%, thus potentially creating or increasing refunds for carryback years. A solid cost segregation strategy can yield significant benefits and has become even more valuable following the TCJA bonus depreciation opportunities and the CARES Act’s changes to net operating loss rules. It is odd to think it took a pandemic to fix a tax problem that Congress would not fix for over two years. In simple terms, Qualified Improvement Property is an improvement made to the interior space of an existing Commercial Rental Property.

The wording of the final bill, however, fails to provide a recovery period, and as a result unintentionally makes QIP ineligible for 100 percent bonus depreciation. The correction set forth by the CARES Act has created an opportunity for increased deductions for taxpayers with QIP.

The Fixtures Fix: Correcting the Drafting Error Involving the Expensing of Qualified Improvement Property

Before the TCJA, most smaller taxpayers could immediately deduct the entire cost of section 179 property up to an annual limit of $500,000 adjusted https://accounting-services.net/ for inflation. For property placed in service in tax years that begin in 2018, the inflation adjusted limit was scheduled to be $520,000.

The change is retroactive for assets placed into service after December 31, 2017. Massachusettsadopts the changes to QIP allowing a 15-year depreciable life, but it does not allowIRC Sec. 168bonus depreciation. Taxpayers computing Understanding Qualified Improvement Property Depreciation Changes Massachusetts corporate excise tax must addback any federal bonus depreciation deduction for QIP. Personal income taxpayers claiming a depreciation deduction from Massachusetts business income must exclude bonus depreciation.

Credits & Deductions

For example, if the retail space is placed in service before the rental space and an improvement is made during a year that the building is nonresidential real property, the improvement could qualify as QIP. However, improvements made during a year that the building is residential real property are not QIP. (A building is considered residential real property in any year that 80% or more of the building’s gross rental income is rental income from dwelling units; see Sec. 168). Note that there could be a change in the building’s use when the residential and nonresidential portions are placed in service at different times.

In a given year, taking bonus depreciation on one asset requires the company to take bonus depreciation on all assets that fall into that respective asset class. This system that requires businesses to deduct their capital expenditures over time rather than immediately is quite complicated and means businesses cannot fully recover the cost of those investments. The disallowed portion of cost recovery understates costs and overstates profits, which leads to greater tax burdens. The tax code increases the cost of capital, which leads to less capital investment and lower employment, output, and wages. It adds to losses that can be carried back, whereas Section 179 depreciation is limited by taxable income, and is carried forward to offset future income. Qualified Improvement Property is now a 15-year, bonus depreciation eligible property, after the CARES Act provided a technical correction from Tax Reform in December 2017. To understand the confusion it begins with an understanding of the history behind QIP.

Tax Policy Watch: What to Expect

Taxpayers and practitioners nationwide have been waiting over 2 years for a technical correction to fix an error in the 2017 Tax Cuts & Jobs Act related to depreciation of Qualified Improvement Property . The error was finally fixed in the recently enacted Coronavirus Aid, Relief and Economic Security Act , and the change has created significant tax-reduction opportunities for some taxpayers. Originally included in the TCJA, bonus depreciation is available for QIP in 2018 and later years. Since bonus depreciation of 100% of an asset’s cost is allowed in 2018 and 2019, this change can provide immediate cash saving opportunities.

A fix, if enacted, would make qualified improvement property placed in service after 2017 eligible for bonus depreciation, because it would then have a 15-year depreciation period. On the other hand, claiming additional first-year depreciation, or even claiming 15-year depreciation, versus 39-year depreciation, could have a negative impact on other business deductions claimed during the placed-in-service year. Taxpayers will want to consider the impact on the uniform capitalization rules, the business interest expense limitation, and some of the international tax deductions, if applicable, that could be adversely impacted by additional depreciation expensing. There are four types of assets eligible for Section 179 and are classified as nonresidential real property with a 39-year depreciable life. The final confusing topic many taxpayers are facing relates to the “Real Property Trade or Business Election”. Many companies made this election to get around the interest limitations under 163and maximize their business interest expense. Unfortunately, this irrevocable election requires companies depreciate their QIP using the Alternative Depreciation System .

Personal Property Used in Lodging

Eligible property includes property with a normal depreciation period of 20 years or less. Qualified improvement property is an improvement made by the taxpayer to an interior portion of a nonresidential building if the improvement is placed in service after the building was first placed in service. Taxpayers changing to 15-year depreciation or 100 percent first-year bonus depreciation from 39-year depreciation are viewed by the IRS as changing from an impermissible to a permissible method of accounting. Qualified Improvement Property is defined as any improvement made by a taxpayer to an interior portion of a nonresidential building placed in service after the building was placed in service. It excludes expenditures for the enlargement of the building, elevators and escalators, or the building’s internal structural framework.

Table 1 compares prior law with the intent of the TCJA and the outcome of the TCJA; though the Conference Agreement clearly meant to improve the cost recovery treatment of QIP, as it stands now, cost recovery was made more restrictive. Full expensing, however, allows businesses to immediately deduct 100 percent of the cost of their capital expenses.