Qualified improvement property (QIP) fix

| 4/1/2020
Qualified Improvement Property (QIP) Fix

Find liquidity through the look-back depreciation opportunity

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) includes a technical correction of an error in the Tax Cuts and Jobs Act of 2017 (TCJA) related to the depreciation of qualified improvement property (QIP). In the TCJA, Congress intended to allow a 15-year recovery period (20 years for alternative depreciation system) and 100% bonus depreciation eligibility for QIP. Due to a drafting error, however, the statute failed to include QIP as eligible property for purposes of the recovery period and the bonus depreciation rules. As a result, QIP was subject to a 39-year recovery period and was not eligible for bonus depreciation.

The CARES Act corrects the error in the TCJA and allows the 15-year recovery period and bonus depreciation eligibility retroactively for property placed into service after Dec. 31, 2017. Accordingly, taxpayers now can claim additional depreciation for QIP placed in service in 2018 and 2019.

Sign up to receive the latest tax insights as well as tax regulatory and administrative updates.

Getting the most from the QIP fix

Identify eligible property.

As a result of the QIP error, many taxpayers stopped separately tracking QIP and instead included their QIP within other building or building improvement property on their tax depreciation registers. For these taxpayers, the opportunity to claim additional depreciation deductions for QIP means thinking about how to identify QIP and recompute the depreciation deduction for QIP placed in service during 2018 and 2019. Taxpayers should work with their tax advisers to perform a cost segregation study to identify and properly segregate the QIP and to help access the added liquidity the additional depreciation deduction can provide.

Determine whether accelerated QIP depreciation can be taken into account on 2019 tax returns.

Taxpayers with QIP placed in service in the 2019 tax year that have not yet filed the 2019 return can simply recompute depreciation for their QIP using a 15-year recovery period and claim bonus depreciation for this property on their 2019 returns.

Determine additional QIP recovery for 2018 and 2019 for already filed returns.

For property placed in service during 2018 or 2019 and for which the pertinent return already has been filed, it is anticipated that the IRS will issue procedural guidance allowing taxpayers an option to claim the additional deductions either through an amended return or by filing an accounting method change.

Evaluate eligibility for pre-TCJA tax rate using NOL carryback.

The TCJA repealed the net operating loss (NOL) carryback for corporations and decreased the tax rate from 35% to 21% for tax years beginning after Dec. 31, 2017. The CARES Act temporarily restores a carryback of NOLs, allowing a five-year carryback for corporations for losses during the 2018, 2019, or 2020 tax years among other NOL carryback changes. The combination of the NOL carryback provision and the QIP fix could maximize the cash and tax rate benefits of the CARES Act. In particular, and depending on the facts and circumstances, C-corporation taxpayers that carry losses back to 2017 or prior years could receive a bigger tax benefit as a result of the rate decrease. However, taxpayers should be aware of the effect of the reduced tax on other provisions.

Specific industry concerns

Real estate.

The TCJA requires taxpayers in the real estate industry to use the alternative depreciation system (ADS) for QIP if they elect out of the TCJA’s interest deduction limitation regime. Even with this ADS requirement in place, real estate businesses will benefit from the QIP fix as the new ADS recovery period for QIP is 20 years versus the 40-year ADS recovery period for QIP before the fix.

Retail automotive.

Retail automotive dealers (and other companies that employ a floor plan debt regime) generally have been disallowed bonus depreciation by the TCJA beginning in 2018. Even with this disallowance, the QIP fix still will accelerate depreciation deductions for dealers and other floor plan companies, because the fix shortens the recovery period on QIP from 39 years to 15 years.

What the QIP fix means

The CARES Act gives taxpayers some much-needed relief in this challenging time. The long-awaited fix to allow accelerated depreciation for QIP paired with the five-year NOL carryback will help taxpayers immediately improve liquidity.

Want more insights on addressing coronavirus-related challenges? 
Go to the Crowe COVID-19 resource center for more analysis and updates. 

Contact us

Our experienced tax professionals can help you tackle your most pressing tax challenges. Contact the Crowe tax team today.
Edward Meyette
Renee Sorrels