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Qualified Improvement Property: An Unintended Consequence of TCJA

Related: Real Estate

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The Tax Cut and Jobs Act (TCJA of 2017 included massive overhauls to the U.S. tax code. An unintended consequence of the TCJA was an unfavorable change to depreciation rules for improvements made to real property, known as “Qualified Improvement Property” (QIP). While the new law provides for significant favorable increases to bonus depreciation and Section 179 property deductions, QIP (which replaces the previous categories of qualified leasehold improvement) is not eligible for bonus depreciation. Only property assigned a life of 15 years or less within the Internal Revenue Code is bonus depreciation-eligible. QIP has been assigned a tax life of 39 years and, therefore, is not eligible for bonus depreciation.

What is Qualified Improvement Property?

QIP is defined by the Internal Revenue Code as an improvement to an interior portion of a building which is nonresidential real property, if such improvement is placed in service after the date the building was first placed in service.

There are some exclusions to this rule, including that the improvement cannot be:

  1. Made to residential property,
  2. The enlargement of the building,
  3. Made to any elevator or escalator, or
  4. The internal structural framework of the building.

Congressional Intent vs. Statute

Within the statutes of the TCJA, QIP was intended to replace the other qualified improvement classifications with the same benefits, bonus depreciation being one of those benefits. However, the statute failed to include the 15-year recovery period. In order to be eligible for bonus depreciation, an asset’s recovery period must be 20 years or less. Because the recovery period was not specified in the new law, QIP has been provided with a life of 39 years, which is not eligible for bonus depreciation. This was not Congress’ intent when writing the law, however; when the regulations were issued, this was not addressed. As a result, QIP is still not eligible for bonus depreciation.

What should you do?

Despite the technical error in the statute and silence from the regulators on a possible correction, taxpayers still have several options in order to benefit immediately from improvements to real property. Improvement expenditures may be eligible for immediate expensing through section 179 depreciation. In some situations, section 179 can be a more favorable method of depreciation, because states recognize section 179 depreciation even if limited, whereas bonus depreciation is generally not recognized by states. Congress may yet issue a technical correction to the law to match its intent. In this case, an amended return can be filed to submit the QIP as eligible for bonus depreciation.

Marcum Observation

It is worth the time and effort to determine if improvements that would fall under QIP are eligible for section 179 treatment and to amend your tax return if Congress decides to act on this issue.

Contact your Marcum tax advisor with any questions about asset life.

 
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