Carrying on our tradition of providing you with Solutions Beyond the Obvious, we are pleased to bring you our “Ask the Experts” series of articles. In these articles, our Tronconi Segarra & Associates tax experts identify and explain the significant tax changes that were passed as part of the Coronavirus Aid, Relief and Economic Security (CARES) Act which can provide additional relief for businesses and individuals facing economic hardship as the result of the coronavirus pandemic. Contact your Tronconi Segarra & Associates tax advisor for more information about any of the topics discussed in these articles.
John J. Callahan, CPA
One of the changes to the Internal Revenue Code corrects a drafting error in the 2017 Tax Cuts and Jobs Act (“TCJA”). The drafting error related to the recovery period for depreciating Qualified Improvement Property (“QIP”). Taxpayers have been anxiously waiting for Congress to correct this error and bring back the taxpayer-friendly depreciation rules.
Taxpayers were introduced to QIP through The Protecting Americans from Tax Hikes (“PATH”) Act of 2015. The original definition of QIP was any improvement to an interior portion of a building which is nonresidential real property if such improvement is placed in service after the date such building was first placed in service. QIP specifically excludes any improvement for the enlargement of the building, any elevator or escalator, or any internal structural framework of the building. When the PATH Act was enacted, QIP joined “qualified leasehold improvements,” “qualified retail improvements” and “qualified restaurant improvements” as specific non-residential property with very beneficial cost recovery lives and methods.
In an attempt to simplify the tax law surrounding the depreciation of non-residential property, the TCJA eliminated all categories of property listed above except QIP. Unfortunately, the TCJA did not specifically assign a recovery period to QIP; so taxpayers were forced to use a 39-year recovery period as a default.
The CARES Act made two significant changes to the Internal Revenue Code relating to QIP. The first change was that it specifically included QIP in the classification that includes other 15-year property. This is extremely helpful to taxpayers as it reduces the recovery period from 39 years but also makes it eligible for a 100% bonus depreciation deduction or a complete write-off in the year placed in service. The other significant change is that now the improvements must be made by the taxpayer.
Due to the changes the CARES Act has made to QIP, taxpayers should consider amending prior year returns and changing the recovery period of any QIP from 39 years to 15 year and claiming bonus depreciation on these improvements. The above changes are retroactive to December 22, 2017 so taxpayers could potentially find additional deductions on their 2019, 2018 and 2017 returns.
If a taxpayer has significant QIP, they could generate large net operating losses (“NOLs”) by claiming bonus depreciation. It is worth mentioning that the CARES Act also changed the rules relating to the utilization of NOLs. NOLs can now be carried back five years to offset income earned in prior years. This could prove very valuable to a C-corporation that may have been in the 35% federal tax bracket. Carrying the losses back for a 35% saving is much better than carrying the losses forward and receiving a 21% savings. Partners of a partnership and shareholders of an S-corporation could also benefit from the carry-back of NOLs. Of course, a full analysis should be done to ensure there are no unexpected consequences when carrying back the losses.
Please contact your Tronconi Segarra & Associates tax advisor for more information on QIP or any tax matter. If you do not have a Tronconi Segarra & Associates tax advisor, please call 716.633.1373 or Contact Us through our website with your question.
This article has been prepared for general guidance on matters of interest only; it does not constitute professional advice. You should not act upon the information contained in this article without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy of completeness of the information contained in this article; and, to the extent permitted by law, Tronconi Segarra & Associates LLP, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this article or for any decision based on it.