The CARES Act was a sweeping piece of legislation that affected many organizations and individuals. While much time was spent on business loans and individual rebate checks, other pieces of the CARES Act also have the potential to truly benefit organizations in the long term. One of these key provisions is the correctional guidance surrounding qualified improvement property (QIP).
What is qualified improvement property?
Qualified Improvement Property (QIP) accelerates significant deductions to enhance cash flow for taxpayers who are improving and/or renovating an existing building. QIP is a tax classification of assets that generally includes interior, non-structural improvements to nonresidential buildings placed-in-service after the buildings were originally placed-in-service.
Want to know if you’re eligible for the qualified improvement property benefit?
What is not included in Qualified Improvement Property?
Common items not considered QIP may include enlargements of the building, elevators and escalators, the internal structural framework of the building and residential property.
What are the effective dates related to Quality Improvement Property?
Rules related to QIP were first enacted January 1, 2016 and provided 50% bonus depreciation with a 39-year recovery period. Then, under the Tax Cuts & Jobs Act of 2017 (TCJA), QIP was intended to be classified as 15-year property; however, due to a drafting error, QIP was not assigned a recovery period of 15-years. As a result, QIP placed-in-service after December 31, 2017, was assigned a recovery period of 39-years and was not eligible for bonus depreciation.
But, the CARES Act fixed the QIP drafting error and assigned a 15-year recovery period to QIP. Now, taxpayers that placed QIP in service during 2018 or 2019 are required to correct the recovery period on the property and claim bonus depreciation on the assets, if otherwise eligible, unless they file an election out of bonus deprecation
Who is eligible to take Qualified Improvement Property?
Any taxpayer who improves a nonresidential building used in their business is eligible to take QIP.
Are hotel building improvements eligible for QIP?
Yes, hotels are eligible for QIP. Hotels are not considered residential buildings. Hotel guests are considered transient and therefore the hotel building is considered nonresidential property.
What are some examples of residential buildings that do not qualify for QIP?
Single family homes, condominiums, townhomes and apartments are considered residential buildings for QIP and, therefore, do not qualify for QIP.
Does QIP apply to just retail building improvements?
No, QIP applies to all qualifying nonresidential buildings. This includes, but is not limited to, hospitals, banks, manufacturing facilities, casinos, hotels, offices and so on.
Can a taxpayer who purchases a building that includes interior improvements, otherwise meeting the definition of Qualified Improvement Property, treat those improvements as QIP
No, QIP only includes improvements made by the taxpayer. A taxpayer who purchases a building cannot claim existing QIP since those improvements were made by the prior owner.
NOTE: The taxpayer is still able to identify existing items that may qualify as personal property and receive bonus treatment on those assets, such as would be done in a cost segregation study.
Are improvements made with Tenant Improvement (TI) allowances considered made by the taxpayer for QIP purposes?
If the taxpayer is considered the owner of the TI when the improvements are made, then the TI can be classified as QIP if the other conditions of QIP are met.
Is QIP still eligible for Section 179 expensing after the passage of the CARES Act?
Yes, however, it may be more beneficial to claim QIP as a 15-year item with 100% bonus rather than to claim it as a Section 179 expense. Bonus depreciation can generate a loss that can be carried back, while an unused Section 179 expense cannot be carried back. Additionally, certain estates and trusts and non-corporate lessors of property are not eligible for the Section 179 deduction.
NOTE: The Section 179 expense is an election that can only be adjusted through an amended tax return. If a taxpayer treated QIP placed-in-service in 2018 or 2019 as Section 179 property, they cannot change their position and claim bonus depreciation on the property without filing an amended 2018 or 2019 return, regardless of whether subsequent tax returns were filed
Does the QIP CARES Act fix mean that the old Qualified Restaurant Property (QRP) provision is back?
No, QRP allowed for a 15-year recovery period for original use new construction, including exterior improvements and structural components. QIP does not include original use new construction, exterior improvements or structural improvements. QIP must be an interior improvement to an existing property.
How can prior filed returns be changed to correct Qualified Improvement Property?
Taxpayers may make QIP changes by filing a Form 3115, Application for Change in Accounting Method, with their 2019 or 2020 tax return or amending their 2018 and/or 2019 returns. Rev. Proc. 2020-25 outlines the options available to taxpayers to correct their treatment of QIP.
How do you best maximize the Qualified Improvement Property Benefit?
There’s much to consider when it comes to the Qualified Improvement Property benefit. Understanding your eligibility, how it works with other credits and deductions and more will be critical.
Maximize your benefit from Qualified Improvement Property.