Depreciable Life of Qualified Improvement Property
(A long overdue technical amendment)
Updated as of April 22, 2020
This article was updated on April 22 to incorporate the guidance of Rev. Proc. 2020-25. It provides another means (the use of filing a Form 3115 in addition to amending a return) by which a taxpayer can implement the shorter tax life given to qualified improvement property (QIP) by the CARES Act. It also gives taxpayers the ability to make a late election or revoke/withdraw an election to use the Alternative Depreciation System (ADS) or not claim bonus depreciation on any asset class for the 2018, 2019 or 2020 tax years.
April 9 Update: As we explain in an April 9 article, Revenue Procedure 2020-23 now allows (until September 30, 2020) partnerships that are subject to the “BBA” rules to make corrections to previously-filed 2018 and 2019 tax returns, thereby implementing retroactive features of the CARES Act in a manner that impacts those tax years (and the partners in place at those times), rather than impacting the 2020 year (and its partners). The reduced tax life and bonus depreciation associated with the Qualified Improvement Property are excellent candidates for this temporary leeway.
The CARES act finally fixes a well-known qualified improvement property (QIP) “glitch” that was bungled in 2017’s Tax Cuts and Jobs Act (TCJA). QIP is generally defined as any improvement made to the interior portion of a nonresidential building any time after the building was placed in service. QIP does not include any improvement for which the expenditure is attributable to the enlargement of the building, any elevator or escalator, or the internal structural framework of the building.
In 2017, TCJA legislation inadvertently caused this category of assets to be assigned a depreciable tax life of 39 years and become ineligible for bonus depreciation. In spite of congressional intent to correct this oversight for more than two years, nothing materialized until now. The CARES Act changes the depreciable life back to its pre-TCJA 15 year life and makes QIP eligible for 100% bonus depreciation. As a bonus to taxpayers, the technical correction is retroactive to January 1, 2018, so additional tax benefits can be realized by taxpayers for their 2018 and 2019 tax years.
Generally taxpayers may have to file an amended return to benefit from this change. However, Rev. Proc. 2020-25 gives taxpayers another option to change the depreciation of QIP placed in service by the taxpayer in a tax year ending in 2018, 2019 or 2020. Additionally the revenue procedure allows taxpayers to make a late election or to revoke or withdraw an election to use the Alternative Depreciation System (ADS) or not claim bonus depreciation on any asset class for the 2018, 2019 or 2020 tax years.
BNN Observation: With the issuance of Rev. Proc. 2020-23, all partnerships, corporations (C or S), trusts, and individuals can file amended returns for 2018 and realize this benefit in the 2018 tax year. BBA Partnerships or partnerships subject to the partnership audit rules should file amended returns and issue amended Schedule K-1s prior to September 30, 2020 before the relief in Rev. Proc. 2020-23 expires.
Some taxpayers have made a farming business or real property trade or business election under Section 163(j)(7)(B) and (C), requiring the use of ADS and disallowing bonus depreciation for certain property. Rev. Proc. 2020-22 gives these businesses much needed relief and flexibility for making or revoking the election to be an electing real property trade or business or electing farm trade or business for the business interest limitations purposes.
Taxpayers should consult their tax advisors to review their facts and determine the best courses of action. For many taxpayers, filing Form 3115 may be the most efficient and fastest way to get the benefit(s) associated with QIP and to make or revoke related elections. However, situations may exist where filing an amended tax return may be a better option (e.g., if a taxpayer is already amending a tax return for other items or amending generates a larger NOL carryback claim.)
BNN Observation: It is important not to forget the state income tax implications of this provision, because many states do not conform to bonus depreciation or allow NOL carrybacks.
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