Technical Amendments in the CARES Act Related to Qualified Improvement Property

Key Points:

  • This code section reinstates the short life for Qualified Improvement Property, which also opens it up for bonus depreciation.
  • We are still unclear if taxpayers will be required to file amended tax returns

In the Past:

Prior to the TCJA, interior improvements made to commercial real property, retail, and restaurant property was given a 15-year life, and was eligible for bonus depreciation. When the TCJA was passed, law makers goofed. They “simplified” the code by removing duplicative definitions of qualified improvement property (“QIP”). This meant that property that was once was allowed to be depreciated over 15-years, subject to bonus depreciation became 39-year property with no bonus depreciation. Given the fact that the TCJA had also increase bonus depreciation to 100% in the year the property was placed in service, this meant that many taxpayers, particularly real estate developers, lost out on huge deduction to which they had been accustomed.

What’s in the CARES Act:

The CARES Act provides a technical correction to the TCJA reinstating the 15-year life for QIP, opening up the property for bonus depreciation deductions. This is being made effective as of the enactment of the TCJA. It would further assign a 20-year life to QIP for ADS purposes.  Taxpayers who placed QIP in service in 2018 or 2019 can adjust their returns to take advantage of the changes to QIP depreciation.  The impact of taking 100% bonus depreciation on QIP could be significant for many taxpayers.  In some cases, these change may create a net operating loss (NOL).  This could create tax refunds, bringing much needed liquidity to businesses who have felt the impact of the COVID-19 pandemic.

What’s Unclear:

Whether taxpayers will be required to file amended returns, or if there will be made some other provision or process for simplified refund claims is unclear. It seems as though amending millions of returns, which would in some cases need to be paper filed, would increase the burden at the already strapped IRS offices to a point where taxpayers would not see benefits of this retroactive application for quite some time.  We are expecting the IRS to release guidance, but we are unclear o the timeline for this.

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