CARES Act Fixes the Retail Glitch and Once Again Makes QIP Eligible for Bonus Depreciation
The Tax Cuts and Jobs Act (TCJA) eliminated three nonresidential real property categories (qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property) and replaced these categories with a broader category called Qualified Improvement Property (QIP).
QIP is any improvement made by a taxpayer to an interior portion of a nonresidential building if the improvement was placed into service after the date the building was first placed into service. 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 QIP (Code Section 168(e)(6)).
Due to a drafting error in the TCJA, QIP was not designated as property with a useful life of 20 years or less, thus failing to qualify as property eligible for bonus depreciation (Code Sections 168(k)(6) and 168(e)(3)(E)) . The legislative history of the TCJA indicates that Congress intended for QIP to have a 15-year recovery period and thus, continue to meet the requirements as qualified property eligible for bonus depreciation. However, the final statute and technical corrections of the TCJA did not reflect this intent and QIP, as 39-year property was not eligible for bonus deprecation after December 31, 2017. So, any QIP placed into service during 2018 and early 2019 was treated as 39-year, nonresidential property depreciated using the straight-line deprecation method.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law on March 27, 2020, and retroactively corrected the TCJA drafting error by including QIP as 15-year property retroactive to the enactment of the TCJA which would allow for 100% bonus depreciation for any QIP property placed into service after December 31, 2017.
On April 17, 2020, the IRS released Rev. Proc. 2020-25, which provided procedural guidance and alternative approaches for implementing changes to bonus deprecation available for QIP placed into service by a taxpayer after December 31, 2017, in the taxpayer’s 2018, 2019 or 2020 taxable years. Specifically, the revenue procedure permits a taxpayer to file an amended return or change in accounting method, to change the depreciation of QIP placed into service after December 31, 2017. The revenue procedure further permits a taxpayer to make a late election under section 168(g)(7), (k)(5), (k)(7) or (k)(10), to revoke an election under 168(k)(5), (k)(7), or (k)(10), or to withdraw an election under 168(g)(7), for property placed into service by the taxpayer during its 2018, 2019 or 2020 taxable year. Finally, to reduce the administrative burden of filing amended returns or AARs to make the aforementioned late elections or revoke and/or withdraw elections, the revenue procedure allows taxpayers to treat such elective acts as a change in accounting method with an accompanying Section 481(a) adjustment for a limited time.
This retroactive tax relief under the CARES Act means some taxpayers could have significant tax benefits that will require a second look at tax returns that have already been filed. It may also create tax planning opportunities in tandem with the revised net operating loss rules, suspension of excess business loss disallowance rules for 2018-2020 and revised business interest expense deduction limitation changes.