Qualified Improvement Property - Bonus Depreciation Update
Congress intended that the Tax Cuts and Jobs Act (TCJA) would provide new rules for the treatment of Qualified Improvement Property (QIP). The new rules would provide a 15-year recovery period (20-year class life/ADS life) and the ability to take bonus depreciation subject to the other eligibility requirements in section 168(k).
QIP is any improvement to the interior portion of a building which is not residential rental made after the property was first placed in service. The definition excludes the enlargement of a building; elevator and escalator work; or internal structural framework.
After enactment, Congress, IRS, Treasury Department and taxpayers all quickly discovered that, due to a drafting error, the TCJA did not give QIP a 15-year recovery period (or 20-year class life). This error resulted in QIP having a 39-year life and being ineligible for bonus depreciation. Congress, the IRS, and the Treasury Department all indicated that Congress would need to pass a technical correction to achieve the desired result. In August 2018, certain members of Congress wrote a letter to the IRS and Treasury asking that the IRS’ enforcement of the TCJA be consistent with Congress’ intent. In December 2018, H.R. 88 contained language that would have corrected the QIP issue. That bill was not enacted.
Most people expected that this issue would have been corrected by now, but a slow legislative process has delayed the correction.
Our legislative affairs team is tracking this important technical correction, and we will send out an update as soon as Congress acts.
Options for 2018 tax returns
The current version of section 168 does not allow taxpayers to treat QIP as a 15-year asset or take bonus depreciation on QIP. Unfortunately, the clear Congressional intent does not allow taxpayers to ignore the defects in the statute.
At this point, we do not know when or if Congress will fix this issue. Without a technical correction, a taxpayer may not recognize bonus depreciation on QIP placed in service in 2018 and must assign such property to a 39-year life (or 20 year ADS life).
Possible options for 2018
Some companies’ 2018 tax planning assumed the QIP rules would be corrected. The lack of bonus depreciation could create significant problems for some companies. Companies may consider some of the following options and discuss these options with their tax service providers:
1. Extend – one option would be to extend the tax return to buy more time for Congress to correct the statute. Along with extending, the company might want to consider the following additional steps:
a. Perform a cost segregation study to identify as much short lived (bonus eligible) property as possible.
b. De minimis – apply the de minimis rules to the extent possible.
c. Perform a tangible property regulations (TPR) analysis to identify items that would be deductible under TPR. The TPR analysis is a very fact-intensive study that would involve looking at each individual improvement to determine deductibility.
d. Section 179 – some companies might be able to deduct QIP under section 179 subject to the overall dollar limitations and subject to the numerous exceptions in section 179. One important exception in section 179 would generally preclude a section 179 deduction for a non-corporate lessor.
2. File timely without taking bonus – if the QIP rules are not fixed, companies can file tax returns without bonus depreciation (for QIP). When the statute is corrected, Congress and the IRS will likely provide the ability to file Forms 3115 to recognize bonus depreciation that would have otherwise been available had the statute been drafted correctly. Note, however, we cannot be certain that Congress will apply the correction retroactively.
Next steps: Speak with your tax service provider about this issue and the various options. If a company desires either a TPR study or a cost segregation, companies should allot sufficient time to complete the study.
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Tax Reform: The Tax Cuts and Jobs Act – What you need to know, now
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