As part of the CARES Act, Congress fixed a provision in the 2017 tax law in a move that has been long awaited by tax practitioners.
As part of the Tax Cuts and Jobs Act Congress intended to provide a tax break for businesses to be able to immediately deduct the cost of Qualified Improvement Property (“QIP”). Unfortunately, important language was left out of the final bill, leaving nonresidential building improvements with a 39-year write-off period instead of the intended 15-year period which would have made them eligible for bonus depreciation. This error resulted in the need for a technical correction.
The CARES Act changed this, and taxpayers can now claim first year 100% bonus depreciation on leasehold and other improvements to existing buildings placed in service after December 31, 2017. QIP is defined as “any improvement made by the taxpayer to an interior portion of nonresidential real property if such improvement is placed in service after the building was first placed in service.”
Three categories of assets specifically excluded from this definition that do not qualify for bonus depreciation include:
- Improvements related to the enlargement of a building;
- Elevators or escalators;
- Improvements to the internal structural framework of a building.
Possible Immediate Tax Opportunity
For taxpayers who have yet to file their 2019 tax return, and who do not elect out of 100% bonus depreciation, this deduction can be claimed when the 2019 return is filed. The method for claiming this deduction may be more cumbersome for taxpayers that have already filed their 2019 tax return, or who had QIP placed in service in 2018 for which no bonus depreciation was taken.
The IRS recently released guidance for taxpayers who may have already filed a return without taking advantage of bonus depreciation on QIP placed in service after December 31, 2017, in the taxpayer’s 2018, 2019, or 2020 taxable years. Rev. Proc 2020-25 lays out three methods for taxpayers to retroactively expense these improvements. Eligible taxpayers can either:
- amend their return,
- file Form 3115 for a Change In Accounting Method or,
- for BBA partnerships (those subject to the centralized partnership audit regime) file an Administrative Adjustment Request (“AAR”).
Some of these options have time limits, so be sure to consult your advisor promptly.
In some cases, it may be more beneficial to amend a prior return rather than “catch up” the deduction on a future tax return by filing a Form 3115. One example would be if, in 2018, the additional deduction for the QIP would result in a net operating loss (NOL). If the taxpayer files an amended return, the taxpayer would be able to carry back the NOL and request a refund from a prior period. Each taxpayer should review their specific situation to determine the appropriate action to take.
The revenue procedure also allows a taxpayer to make late elections, or to revoke or withdraw four different elections for 2018, 2019, and 2020, including elections:
- to use the longer Alternative Depreciation System
- to elect out of bonus depreciation
- to use 50% instead of 100% bonus depreciation
- to use special plant depreciation rules for farming businesses
Taxpayers who have made improvements to the interiors of nonresidential property after the property was first placed in service should reach out to their tax professional to chart a plan of action in light of this change to the tax code and the options the IRS has presented for writing off building improvements.
Tom Clemente, Tax Manager