Depreciation rules on qualified improvement property (QIP)
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act, 3/17/2020) retroactively corrects the Tax Cuts and Jobs Act (TCJA, 12/22/2017) drafting error that omitted QIP from the option of claiming 15-year straight-line depreciation which would allow for 100% bonus depreciation. (Code Sec. 168(k)(6); Code Sec. 168(e)(3)(E)) Prior to the CARES Act correction, QIP placed in service in 2018-2019 was treated as 39-year, nonresidential real property depreciated using the straight-line depreciation method.
QIP is an improvement to an interior portion of a nonresidential building that is placed in service after the date the building was first placed in service. An example of QIP is a restaurant build out or renovation. However, expenditures relating to the enlargement of a building, elevator or escalator, or the internal structural framework of the building do not meet the definition of qualified improvement property. (Code Sec. 168(e)(6))
There are some planning considerations when deciding to amend a return to either take 100% bonus on QIP or whether to depreciate over 15 years. For example, if a client has a long-term plan on holding the QIP property, then taking advantage of 100% bonus depreciation deductions to lower taxable income may be the best plan. However, if a client is considering selling the QIP property in the near future, then any Code Sec. 1250 depreciation recapture on the sale of the property, which is taxed at a higher (up to 25%) rate (Code Sec. 1(h)(6)(A)), should be considered.
Also, a passthrough member or shareholder's ability to take the deduction for 20% Qualified Business Income (QBI) may be significantly reduced if 100% bonus depreciation is retroactively deducted on QIP. Still, if the 100% bonus depreciation on QIP property pushes your client into an NOL loss position, it may be more beneficial to carryback those losses to years where a tax refund can be generated.