CARES Act Gives Bonus Depreciation to QIP

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) includes a technical correction that assigns a 15-year recovery period to qualified improvement property (QIP) placed in service after 2017. (Without the technical correction, a 39-year recovery period applied). Most post-2017 QIP retroactively qualifies for the bonus depreciation deduction. Any MACRS property with a recovery period of 20 years or less is a bonus depreciation property.

Bonus Depreciation of QIP

QIP placed in service after 2017 now generally qualifies for a 100% bonus deduction. However, QIP acquired before September 28, 2017 (e.g., because construction began before that date) does not qualify for the 100% rate even if it is placed in service after 2017. QIP acquired before September 28, 2017, qualifies for a 40% bonus rate if it is placed in service in 2018, or a 30% bonus rate if it is placed in service in 2019.

A 100% bonus rate is applied to QIP acquired after September 27, 2017 and placed in service in 2017 regardless of the QIP depreciation period. A 50% rate is applied to QIP acquired before September 28, 2017 and placed in service in 2017. The technical correction in the CARES Act has no impact on this property.

QIP Definition Clarified

QIP is an internal structural improvement (section 1250 property) made to nonresidential real property after the real property is placed in service.

However, QIP does not include expenditures attributable to:

  • the enlargement of a building,
  • an elevator or escalator, or
  • the internal structural framework of a building.

The CARES Act clarifies that the improvement must be “made by the taxpayer.” This means that a taxpayer may not purchase real estate and treat improvements previously made by the seller as QIP. However, this requirement is not expected to affect lessors who gave construction allowances to tenants that allow them to depreciate improvements the tenants built.

Taking Action: Form 3115 and Amended Return Options

Taxpayers who filed returns that used a 39-year recovery period to depreciate post-2017 QIP should file a Form 3115, Application for Change of Accounting Method, or an amended return in order to take advantage of the new 15-year recovery period.

The IRS has confirmed it will issue additional guidance in the coming weeks. Many hope this guidance may provide a simpler method for taxpayers to correct prior returns. Consequently, practitioners may wish to wait until specifics are released.

Automatic Accounting Method Changes

Under general tax accounting rules, taxpayers who filed more than one return that used the now incorrect 39-year recovery period to depreciate QIP have adopted an impermissible method of accounting. Taxpayers usually correct this type of error by:

  1. filing an automatic accounting method change on Form 3115, and
  2. claiming a negative (favorable) section 481 adjustment for the difference between the 100% bonus depreciation deduction and the depreciation that was actually claimed.

However, a taxpayer that filed only one incorrect return may either file an amended return or, if more convenient or advantageous, file Form 3115. For example, a taxpayer that placed QIP in service in 2018, and has not yet filed a 2019 return, may file Form 3115 with the 2019 return rather than filing an amended 2018 return even though an impermissible accounting method was not adopted.

In addition to filing Form 3115 with the return for the year of change, a taxpayer must file Form 3115 with the IRS’s Ogden Utah office. The Ogden office filing is due when the tax return with Form 3115 is filed.

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