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CARES Act Designates Qualified Improvement Property (QIP)

Marc Ausfresser, J.D., LL.M.

3.31.20 | Client Alert – COVID-19 Update

The recently enacted Coronavirus Aid, Relief and Economic Security (CARES) Act includes the long-awaited correction of the “glitch” contained in TCJA 2017 which failed to designate “qualified improvement property” (QIP) as 15-year Modified Accelerated Cost Recovery Systems (MACRS) property.  The CARES Act now designates QIP as 15-year MACRS property, and assigns a 20-year life if an Alternative Depreciation System (ADS) is elected or required. Significantly, this amendment is made retroactive to 2018, as if originally included in TCJA 2017.

As before, QIP includes any improvement to the interior of a non-residential building which is placed in service after the building has been first placed in service. However, specifically excluded are expenditures attributable to:

  1. any enlargement of the building;
  2. elevators and escalators; and
  3. the internal structural framework of the building.

This means that QIP placed in service in 2019 will qualify for the shorter 15-year life (rather than 39 years) and  generally will qualify for 100% bonus, unless an election out is made.  However, it is important to remember that a taxpayer that made the election out of the interest-limitation provisions of sec. 163(j) in 2018, or makes such election in 2019, is required to use ADS for real estate assets, and therefore will not benefit from either the 15-year life or the availability of bonus depreciation for QIP (the 20-year ADS life will apply). We will await to see if there is any further guidance as to whether a revocation of such election will be permitted, but as of now it should be assumed that section 163(j) elections remain in effect.  It is also important to bear in mind that many states or localities do not recognize bonus depreciation, so that this possible negative effect must be considered when deciding as to the advisability of electing out.

The retroactive effective date may provide refund opportunities related to claiming bonus depreciation on QIP for 2018. Assuming bonus could have applied for QIP placed in service in 2018, it would appear that affected taxpayers can either amend the earlier return, or claim the additional depreciation by filing a change in accounting method on Form 3115 in 2019 or in 2020.  The same three options should also be available for taxpayers changing from a 39-year life to a 15-year life (if no bonus is claimed) or from 40-year ADS to the new 20-year ADS life if election out of sec. 163(j) was made. It is not clear how a taxpayer who wishes to elect out of bonus on QIP for 2018 will be able to do so, as technically the election to opt out of bonus is required to be made on a timely filed return, and cannot be done by amending. Again, we will await further guidance on these issues, and will follow up when any such guidance is issued.

For additional information on matters relating to the COVID-19 pandemic, please contact your Berdon Advisor.