Let us help you take full advantage of changes enacted this year
By Jennifer M. Larson, CPA
This may be shocking to learn, but sometimes Congress makes mistakes.
For example, the 2017 Tax Cuts and Jobs Act (TCJA) resulted in Qualified Improvement Property (QIP) having a depreciable life of 39 years. This meant you couldn’t claim bonus depreciation if you made interior improvements to a non-residential building in 2018 or 2019.
But Congress corrected itself this year when it passed the CARES Act. That law reclassified QIP as depreciable over 15 years, not 39. QIP is now eligible for 100 percent bonus depreciation through 2022. QIP also is now subject to a 20-year depreciable life per the Alternative Depreciation System effective after 2017.
All of which brings up some important questions for building owners. Do the changes included in the CARES Act apply to your interior improvements? How much of a tax savings would this mean? How should you take advantage of the changes?
Let’s tackle that first question about where the changes apply.
Most importantly, qualified improvements can only be on the interior, and only on non-residential buildings. Hotels, condos and apartments need not apply.
Secondly, the improvements must have been made after the building became operational. Building enlargements are ineligible, as are elevators, escalators and any internal structural framework changes.
Next question: Just what kind of tax savings are we talking about? Every situation is unique, of course, but applying 100 percent bonus depreciation to larger interior improvement projects could produce a major tax break, maybe even enough to result in an overall net operating loss. For businesses struggling with cash flow due to the pandemic, this could be a lifesaver.
Finally, the question of how to take advantage of the QIP changes. The short answer is to amend your 2018 tax return, or to file IRS Form 3115, Application for Change in Accounting Method, with your 2019 tax return.
However, it’s rarely that simple when it comes to the IRS, which is why they issued additional, detailed guidance several months ago. But let’s be honest: You don’t really want to read an IRS document called “Rev. Proc. 2020-25.” The good news is that we read it so you don’t have to.
And that’s why we’re ready to help you properly apply the IRS guidance on exactly how to claim QIP bonus depreciation under the new rules. Call or email us and let’s talk about it.