As we near the end of an unprecedented year, I wanted to touch upon one of the provisions the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) enacted regarding qualified improvement property (QIP) and the “technical correction” (Revenue Procedure 2020-25) the IRS issued.
As we all know, with the Tax Cuts and Jobs Act (TCJA) came a change in various cost recovery rules. With the TCJA, qualified improvement property was required to be depreciated over a 39-year period and taxpayers were not able to take bonus depreciation.
With the CARES Act, the IRS issued a “technical correction” which allows for a 15-year recovery period for assets placed into service after 2017 and retroactively qualifies those assets for the 100% bonus depreciation as long as all bonus requirements are met. This normally applies to property with a MACRS recovery period of 20 years or less.
Defining Qualified Improvement Property
Qualified Improvement Property is defined as follows:
- Property must be an improvement made by the taxpayer to an interior portion of a building which is nonresidential real property
- Improvement must be placed into service after the date such building was first placed into service
- Improvement must be placed into service after December 31, 2017
QIP does not include improvements related to elevators and escalators, the internal structural framework of a building, or an enlargement of a building.
Corrections to Filed Tax Returns
Those taxpayers who filed their 2018 or 2019 tax returns and used the 39-year recovery period to depreciate post-2017 QIP can file either an amended tax return, an Administrative Adjustment Request (AAR), or Form 3115, Application for Change of Accounting Method, to take advantage of the new 15-year recovery period or bonus depreciation.
Those who filed 2018 and 2019 tax returns or more than one tax return using the 39-year recovery period to depreciate QIP have, in fact, adopted an “impermissible accounting method”. In order to correct this to a “permissible accounting method”, the taxpayer must submit Form 3115 for an automatic accounting method change and claim a favorable (negative) section 481(a) adjustment for the difference between 100% bonus depreciation and depreciation that was already claimed in the previous years.
For those taxpayers that have filed only their 2018 tax return or one tax return, they may file an amended tax return or retroactively apply for the “technical correction” by filing Form 3115 with their 2019 tax return, whichever is more advantageous.
Code Section 168 Late Elections or Revocation of Certain Elections
For a limited time, the IRS is granting late elections to make or revoke an election for depreciable property placed into service by the taxpayer during its 2018, 2019, or 2020 tax year. The tax return must have been timely filed and filed on or before April 17, 2020. The covered elections are as follows:
- Use of alternative depreciation system (ADS) under Code Section 168(g)(7)
- Claim bonus depreciation on plants in the year of planting under Code Section 168(k)(5)
- Elect out of bonus depreciation under Code Section 168(k)(7)
- Elect to claim bonus depreciation at 50% first year instead of 100% under Code Section 168(k)(10)
Taxpayers may choose one of the above elections by filing an amended tax return, an AAR, or Form 3115 with a timely filed tax return.
Similarly, taxpayers may revoke a previous election of Code Sections 168(k)(5), 168(k)(7), and 168(k)(10) by filing either an amended tax return, an AAR, or Form 3115. To withdraw a previous election of Code Section 168(g)(7), taxpayers may file only an amended tax return or an AAR.
If you have any questions about the technical change in qualified improvement property, please contact our office.
Article Submitted by Béatrice R. Calen, EA