The global pandemic caused by the Coronavirus (COVID-19) has impacted nearly every corner of the world and disrupted daily life in an unprecedented manner. At Miller Cooper, we are committed to help you navigate through this by providing you with uninterrupted service and guidance on the best course of action for your individual company needs. We are continuously monitoring the tax law changes and how these changes will affect our clients and evaluating how we can best support our clients and partners as we move towards the new normal.
Below is a brief overview of one of the tax law changes that has come about through the Coronavirus Aid, Relief and Economic Security (CARES) Act and how Miller Cooper’s Specialty Tax Solutions team can help you.
Technical Correction to Qualified Improvement Property
The Coronavirus Aid, Relief and Economic Security (CARES) Act, passed March 27, 2020, provided a much-anticipated technical correction to Qualified Improvement Property (QIP).
QIP is defined as any improvement made by the taxpayer to an interior portion of a building that is nonresidential real property, if such improvement is placed in service after the date the building was first placed in service. This does not include any improvement expenditures for the enlargement of the building, any elevator or escalator, or the internal structural framework of the building.
The original Tax Cuts and Jobs Act of 2017 (TCJA) intended to classify improvements to the interior portion of nonresidential buildings as 15-year depreciable property eligible for 100% bonus depreciation. Due to drafting errors, the TCJA omitted this language to classify QIP as 15-year property and as a result QIP did not meet the requirements for bonus depreciation.
The CARES Act addresses this error and now classifies these improvements as 15-year property (vs the 39-year life), which makes it eligible for 100% bonus depreciation retroactive to January 1, 2018. As such, taxpayers may be able to amend prior year 2018 and 2019 tax returns, if filed previously, to claim the additional depreciation expense.
Certain large partnerships would have the option to file amended returns for 2018 or 2019. However, such amendments would need to be filed by September 30, 2020. The partners would also have to amend their prior year(s) filings to reflect the change in income. Otherwise, an Administrative Adjustment Request (AAR) would need to be filed. The adjustments from the AAR are included with the filing of the partners’ current year (2020) return with any prior year adjustments. This approach may not require the partners to file an amended return for a previous year filing, but it would also delay the benefit until the 2020 return is filed in 2021.
Taxpayers who made the Real Property Trade or Business Election so that they would not be subject to the interest expense limitations imposed by Internal Revenue Code Section 163(j) must depreciate their assets under the ADS depreciation method. As such, QIP would be classified as 20-year real property, which would not be eligible for bonus depreciation. While personal property would also be subject to ADS, it would still be eligible for bonus depreciation. Therefore, cost segregation studies on QIP could still be a valuable option. In addition, taxpayers may revoke their Real Property Trade or Business Election by amending their prior year tax return or by filing an Administrative Adjustment Request.
In June 2018, ABC Company made interior improvements to their existing building in the amount of $1,200,000. For the tax return in 2018, the taxpayer depreciated the building, under existing legislation, over 39 years and had a resulting depreciation deduction of $16,692.
As a result of the CARES Act, ABC Company would now be able to retroactively “catch-up” the depreciation to take advantage of the new QIP tax recovery period of 15-years, which would be eligible for 100% bonus depreciation. In other words, the correct depreciation should have been the entire cost basis or $1,200,000 in 2018. The resulting “catch- up” deduction for the taxpayer will be $1,183,308 ($1,200,000 less previously deducted depreciation of $16,692).
A Note of Caution
Under existing legislation, not all improvements necessarily qualify for the QIP designation. For example, roof top HVAC units would be excluded from this asset classification along with any exterior site improvements. Careful consideration of tenant improvements needs to be taken to ensure they qualify.
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Miller Cooper’s Specialty Tax Solutions team of tax and engineering experts is here to help you maximize tax deductions so that you can minimize the tax liabilities during this difficult economic time.