The CARES Act economic stimulus package approved by Congress includes a tremendous opportunity for property owners to take 100% bonus depreciation for qualified improvement property (QIP) retroactively. Specifically, property owners who used cost segregation for faster depreciation can either file a Form 3115, change of accounting method, or amend 2018 and 2019 returns to generate potential refunds.
QIP refers to an interior portion of a nonresidential building that was improved after the building was first placed in service. Examples include qualified restaurant property, qualified retail property and qualified leasehold property. Excluded are any expenditures related to the enlargement of a building as well as an elevator or escalator, or the internal framework of the building.
When the Tax Cuts and Jobs Act of 2017 (TCJA) was enacted, QIP was intended to be included in property that would have a 15-year depreciable life, which would qualify that property for 100% bonus depreciation under section 168(k) and allow for an immediate deduction. A simple drafting error excluded QIP from the final bill. As a result of the error, QIP was assigned a depreciable life of 39 years in the final law, a major disadvantage for property owners and tenants who invested in qualified improvements. A number of attempts to fix the error were unsuccessful—until now.
The QIP Fix
The CARES Act made the technical correction to bonus depreciation with respect to QIP, providing a much-needed boost to businesses that are being harshly impacted by the COVID-19 pandemic. The fix not only includes QIP as a 15-year property, it also made the change retroactive to December 22, 2017, the TCJA enactment date.
This means that property owners can recover QIP costs incurred in the past two years as bonus depreciation, adding significantly to a company’s cash flow in a time of great need. Going forward, QIP costs can be treated as bonus depreciation on current returns.
This change can trigger larger net operating losses (NOLs), which under the CARES Act can now be carried back up to five years, resulting in cash now!
If you have projects that meet the QIP definition, you will need to act now to revise your previous tax returns, or adjust your cost segregation report completed for qualified projects. QIP changes can be captured by filing a Form 3115, change of accounting method on the 2019 tax return, provided you have not filed a Form 3115 in the past five years. You can also file amended returns for the years impacted by the change, which will likely result in immediate refunds for taxes paid in the prior years.
ETS Can Help Amend Past or Open Cost Segregation Studies
Engineered Tax Services will work with property owners to amend returns and claim bonus depreciation. Given the uncertain times we are experiencing, we recognize the greater need for cash flow. Contact us to receive more information about claiming QIP bonus depreciation.
To learn more about cost segregation studies for real estate owners and investors, call Engineered Tax Services at (800) 236-6519 or visit cost segregation page for more information.