Qualified Improvement Property: Beware of a Potential Tax Trap Thompson Greenspon

If an improvement qualifies under the rules of QIP, an entity must depreciate it over the 15-year prescribed recovery period for tax purposes. If the entity uses any other depreciable life, the IRS could consider that an alternative depreciation system was elected which would make the improvement subject to using a 39-year recovery period. This would also put any other properties eligible for the 15-year recovery period, and that were placed into service the same tax year, at risk for reclassification to longer periods. The intent of the TCJA in 2017 was to eliminate all other categories of 15-year depreciated improvement property, and to insert QIP as the only 15-year improvement property.

One thing worth noting about this change is that the original placed in service date of the building does not have to be by the current owner. While the improvements need to be made by the current owner in order to qualify, they can install them in an existing building that they just acquired. For example, a taxpayer can purchase an existing building and immediately start a renovation. The portions of the renovation that meet the requirements will qualify for the expanded bonus depreciation rules. This will allow many taxpayers to consider renovating existing buildings instead of building brand new properties. Generally, an accounting method is not adopted until a taxpayer has used it for at least two years.

What Doesn’t Qualify?

This information is brought to you by Checkpoint Edge, the award-winning, AI-powered tax and accounting research tool from Thomson Reuters. Replacement of existing HVAC, roofs, etc. are eligible to be written off when replaced. This will enable a business to take write-offs instead of carrying the NBV of two assets simultaneously. Learn to leverage market conditions with custom financial, tax, and operational tactics. Help improve your return on investment with tailored strategies for the specific needs of your real estate company. Major thanks to our new Cost Segregation Leader, Mona Stocki, for her assistance with this post.

However, due to the timing of the change the IRS may issue guidance in the coming weeks. If you have any questions, please contact a member of the Cost Segregation Services team or the NTO Accounting Methods group. These teams have extensive experience assisting taxpayers of all industries and sizes with their cost segregation/fixed asset and accounting method issues and opportunities. Under the Tax Cuts and Jobs Act, along with a technical correction in the CARES Act, QIP qualifies for 100% bonus depreciation until 2022.

What is Qualified Improvement Property (QIP)?

A provision of the Coronavirus Aid, Relief and Economic Security (CARES) Act has provided a much-anticipated technical amendment regarding “qualified improvement property” (QIP). This provision corrected a flaw in the Tax Cuts and Jobs Act (TCJA) of 2017, and has made QIP eligible for bonus depreciation of 100%, applied retroactively to tax years beginning after December 31, 2017. Any enlargement of the building, any elevator or escalator, and any internal structural framework do not meet the requirements of qualified improvement property. Qualified improvement property is depreciated using the straight-line depreciation method. Because the IRS now views depreciation of QIP placed in service after 2017 using a 39-year recovery period as an impermissible accounting method.

If your construction company owns commercial property, placed QIP in service in 2018 or 2019, and have been depreciating it over 39 years, doing nothing isn’t an option. By correcting this error, the CARES Act allowed commercial property owners to claim significant bonus depreciation deductions for building improvement expenses. And, because the fix was retroactive to the beginning of 2018, it provided an opportunity for owners that made such improvements in 2018 and 2019 to amend their returns for those years, claim the deductions they missed, and seek a refund of any tax overpayments.

Used Electric Cars and Taxes

The assets would then be subject to amortization over the new remaining life of the lease term. Other factors which could affect the assurance of the exercise of a renewal option are penalties in the contract for termination and optional bargain buyouts after the next lease period. The addition of a leasehold improvement could make any penalty economically detrimental for the lessee to incur because of the increased value the improvement provides. It could also make the buyout at the end of the lease more attractive since the leased property is already customized for the entity’s business purposes.

This section of our Tax Practice Series provides a detailed overview of the three systems of depreciation available for tangible property. From in-depth research and analysis to timesaving practice aids, Bloomberg Tax has the resources you need to provide informed advice.

Scalping Stock Trading and Taxes

Please contact your Smith Schafer professional to help you consider if this change is beneficial for your business. This article discusses the history of the deduction of business meal expenses and the new rules under the TCJA and the regulations and provides a framework for documenting and substantiating the deduction. Your guide for an easy, accurate way to comply with state depreciation across multiple states. BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. 5 on May 31, 2023, to repeal several tax credit programs, including credits against numerous Florida business taxes. Let us show you how you could save your clients thousands of dollars and make tax planning easier than ever with Corvee.

Qualified Improvement Property (QIP) is now a 15-year, bonus depreciation eligible property, after the CARES Act provided a technical correction from Tax Reform in December 2017. Large dollar amount lump sum improvements should not be automatically recorded as QIP with bonus depreciation. Time needs to be invested to review the financial and construction detail looking for items such as roofing, windows, exterior doors, façade work, and even HVAC.

What is the rate of bonus depreciation on QIP?

Moreover, 100% bonus depreciation is mandatory for QIP unless a taxpayer opts out in favor of depreciation over 15 years. Though there are some similarities, qualified improvement property does not require that the improvements be made 3 years after the placed in service date, which is different than what is required in the leasehold improvement property. Also, with QIP, the parties involved in the improvements of the property do not have to be unrelated.

• Though there are some similarities, qualified improvement property does not require that the improvements be made 3 years after the placed in service date, which is different than what is required in the leasehold improvement property.
• Bonus depreciation may be retroactively applied to qualified improvement property placed into service in the 2018 and 2019 taxable years and may create losses, which could result in tax refunds.
• Or they can correct the depreciation for such «one-year property» by filing an amended return.
• By correcting this error, the CARES Act allowed commercial property owners to claim significant bonus depreciation deductions for building improvement expenses.

The technical amendment included in the CARES Act corrects this error by changing the depreciable life of QIP from 39 years to 15 years, which renders QIP eligible for 100% bonus deprecation under IRC 168(k). Regulations surrounding mixed-use realty properties are more complex because although they are technically designed for residential use, they are considered nonresidential buildings. For example, an apartment building with stores on the ground floor may qualify, to a degree, because a portion is https://accounting-services.net/understanding-qualified-improvement-property/ solely dedicated to nonresidential use. Bonus depreciation may be retroactively applied to qualified improvement property placed into service in the 2018 and 2019 taxable years and may create losses, which could result in tax refunds. This chart provides an at-a-glance look at the tax treatment of depreciation for qualified improvement property from 2004 to now. Based on current tax law, it is more important than ever to properly identify and quantify property that is eligible for QIP treatment.

Call us at +1-800-322-7776 or fill out form below.

A real property trade or business or farming business that elects out of the §163(j) business interest deduction limit must instead use the ADS to depreciate qualified improvement property using the straight-line method over 20 years. Although bonus depreciation doesn’t change the amount deductible for the cost of qualified improvement property, it accelerates depreciation of qualified improvement property. This defers payment of tax on earnings, thus lowering the pre-tax rate of return that an investment in qualified improvement property must earn to achieve the desired after-tax rate of return.