Businesses Can Now Enjoy Faster Depreciation of Real Estate Qualified Improvement Property

A technical correction in the Coronavirus Aid, Relief, and Economic Security (CARES) Act, signed into law in late March, retroactively allows real property owners to depreciate qualified improvement property (QIP) faster than before. The change could lower your tax bill for 2018 and beyond.

Drafting error

Under 2017’s Tax Cuts and Jobs Act (TCJA), QIP is defined as an improvement to an interior portion of a nonresidential building that’s placed in service after the building was first placed in service, which is a broader definition than before the TCJA. (QIP doesn’t, however, include expenditures attributable to any elevator or escalator, the enlargement of the building, or the building’s internal structural framework.)

When drafting the TCJA, members of Congress made it clear that they intended QIP placed in service in 2018 and beyond to be eligible for 15-year straight-line depreciation. This, in turn, would have allowed QIP to be eligible for the TCJA’s first-year bonus depreciation break (100% for property placed in service in 2018 through 2022, gradually reduced from 2023 through 2026).

However, due to a drafting error, QIP wasn’t included in the statutory language’s definition of 15-year property, which meant it wasn’t eligible for the intended first-year bonus depreciation break. Instead, QIP defaulted to being treated as nonresidential real property depreciated over 39 years using the straight-line method. The only way to fix the mistake was to make a technical correction.

Corrected at last

There’d been talk of a technical correction ever since the TCJA was signed into law, but it didn’t come to fruition until the CARES Act made the correction. As a result, QIP is now included in the Internal Revenue Code’s definition of 15-year property. In turn, that classification makes QIP eligible for first-year bonus depreciation.

The correction is retroactive for QIP placed in service in 2018 and 2019. If you placed any QIP in service in those years and have filed returns for them, amending those returns could provide an immediate tax refund.

But don’t assume that claiming 100% bonus depreciation is your best option. In some situations, spreading out your depreciation deductions over a 15-year period may provide more benefit. For example, 15-year depreciation might be better if you plan on selling the property relatively soon, if you anticipate being in a higher tax bracket in the future or if you’re eligible for the qualified business income (QBI) deduction generally available to pass-through entities.

What next?

As you can see, many considerations are involved when it comes to depreciation decisions for QIP. Contact one of our tax professionals at (973) 298-8500 to determine your best course of action.