James J. DeLuca, CPA, MST
Senior Tax Manager
As companies face continued reductions in business heading into 2021 due to Covid-19, many are hurting and looking for every opportunity to recoup losses.
A bonus depreciation provision in the Coronavirus Aid Relief and Economic Security (CARES) Act enacted in early 2020 may help business owners who have remodeled or otherwise improved their properties in the past three years. The provision restores 100% bonus depreciation for changes made to the interior of commercial buildings — known as qualified improvement property (QIP). As a result, business owners who have made such improvements since January 1, 2018, may be able to recoup taxes paid for the 2018 or 2019 tax years. This applies to those who lease commercial property, as well as property owners.
The provision was included in the CARES Act to correct a technical error that was made in the Tax Cuts and Jobs Act of 2017. Before the tax overhaul was passed, QIP had qualified for 100% bonus depreciation, but due to a drafting error in the tax bill it was redefined as being depreciable over 39 years, as opposed to 15 years, and no longer received that treatment.
By definition, QIP is any improvement to the interior of a building that is nonresidential real property if the improvement is made after the building was first placed in service. Such improvements may include remodeling of bathrooms, installation of new flooring or upgrades to plumbing and electrical systems.
The CARES Act fixed the problem by treating QIP as being depreciable over 15 years and qualifying for accelerated depreciation of bonus depreciation. The change was made retroactive to 2018.
Taxpayers who placed QIP in service during 2018 and 2019 were forced to depreciate it over a long period of 39 years.
Under guidance issued by the IRS in early 2020, taxpayers are allowed to retroactively change the depreciable life of QIP improvements placed in service in 2018 and 2019 from 39 years to 15 years, thereby allowing the improvments to be eligible for accelerated depreciation of 100 percent bonus depreciation.
How to access tax benefits
If you made improvements to eligible property during that period, you may take advantage of these retroactive tax benefits in one of two ways:
- Change your 2018 and 2019 tax returns to claim the shorter 15-year depreciable life and claim the accelerated depreciation by filing amended returns for these years, or
- Treat the change as a change in accounting method and claim the entire deduction for 2018 and 2019 tax years on your 2020 tax return.
Also in accordance with the CARES Act, any net operating losses caused by treating QIP additions as 15-year depreciable property for tax years 2018 and 2019 can be carried back to the five previous years.
The retroactive change to QIP by the CARES Act and the IRS guidance provides taxpayers with opportunities to reduce taxable income and possibly be able to apply for tax refunds for the applicable years.
If you made improvements to eligible property during 2018 or 2019, contact us for a discussion as to how you can benefit from this change in the law.
