April 20, 2020 - The Coronavirus Aid, Relief, and Economic Security (“CARES”) Act provided a long-awaited technical correction to the Tax Cuts and Jobs Act (“TCJA”) that was passed in 2017. The TCJA created a single asset category for real property improvements called qualified improvement property (“QIP”). Prior to the TCJA, the depreciable life for the classes of property that were combined into the QIP category was 15 years. These properties were also eligible for bonus depreciation.
The TCJA failed to specify a life for the new category which effectively made all QIP assets general nonresidential real property recoverable over a 39-year period and ineligible for bonus depreciation. The CARES Act now designates QIP as 15-year property for purposes of claiming Federal depreciation expense. That designation also makes QIP eligible for immediate 100% bonus depreciation. Note that QIP includes only real property improvements made by the taxpayer and does not include improvements acquired as part of the purchase of real property. The change is permanent and may be applied retroactively for QIP placed in service after December 31, 2017.
The IRS has issued Revenue Procedure 2020-25 which provides the following actions taxpayers may take to retroactively claim the benefits of a shorter depreciable life and bonus depreciation for QIP. These actions may be taken for QIP placed in service by a taxpayer after December 31, 2017 and reported on its 2018, 2019, or 2020 income tax returns
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- Amended Tax Return: A taxpayer may amend its 2018 and 2019 (if already filed) Federal income tax returns to claim the additional depreciation expense, including 100% bonus depreciation, for QIP. If the amendments create or increase a net operating loss, the taxpayer can file a refund claim by carrying back that loss to the five preceding tax years.
- Accounting Method Change: A taxpayer may file Form 3115, Application for Change in Accounting Method, to report the cumulative effect of applying the new QIP rules, including 100% bonus depreciation, in the tax year the method change is filed.
These actions do not apply to a real property trade or business or farming business that made a late election (or withdrew an election) regarding the treatment of depreciation expense for purposes of the interest expense limitations under Internal Revenue Code (“IRC”) Section 163(j). Any changes to depreciation for QIP placed in service by these businesses must be made in accordance with the guidance specifically issued by the IRS for those situations. The permitted actions also do not apply to QIP for which the taxpayer claimed an ordinary expense for the cost or other basis of the property.
Revenue Procedure 2020-25 also provides guidance instructing taxpayers how to revoke or withdraw certain elections made in prior tax years. These include the election not to apply the bonus depreciation rules to certain classes of assets and the election to depreciate certain classes of assets under the Alternative Depreciation System (“ADS”). A taxpayer’s revocation or withdrawal of these elections made in a prior year may also provide another tax beneficial opportunity to take advantage of the new QIP rules.
The changes in the CARES Act for QIP provide several opportunities for taxpayers to receive immediate tax benefits through acceleration of depreciation expense. Your Whitley Penn tax advisor will coordinate with you to determine the best plan for your company to take advantage of these changes.
