January 12, 2021 - Douglas Myser

Qualified improvement property changes. Qualified improvement property, or QIP can include the following: roofs, heating and air conditioning equipment, fire protection, security equipment, installation or replacement of drywall and ceilings, interior doors, mechanical, electrical and plumbing. The improvement must be for "Made by the taxpayer" (new requirement in the CARES Act), made to an interior portion of a nonresidential (commercial, retail, factory) building: made to a building that is already in service. "Made by the taxpayer" requirement significant for acquired buildings: Before the CARES Act: Portion of purchase price of acquired building was QIP. After CARES Act: No portion of purchase price of acquired building can be written off in acquisition year as QIP improvements are QIP only if made for taxpayer claiming depreciation. Qualified improvement property changes.

Revenue Procedure 2020-25, Under Revenue Procedure 2020-25, QIP qualifies for 100% first year bonus depreciation if it was acquired after September 27, 2017, and placed in service after December 31, 2017, in a tax year ending in 2018, 2019, or 2020. Under current law, 100% first year bonus depreciation starts to phase down in 2023. Taxpayers changing to 15 year depreciation or 100 percent first year bonus depreciation from 30 year depreciation are viewed by the IRS as changing from an impermissible to a permissible method of accounting. This qualifies for the automatic change of accounting method procedures. Taxpayers have until October 15, 2021, to file an amended income tax return or Form 1065 for the placed in service year of the QIP, but to no event later than the applicable period of limitations on assessment for the tax year for which the amended return is being filed.

Many of the provisions of the CARES Act were structured to get cash into the hands of taxpayers quickly to help businesses and individuals deal with the adverse impacts of the COVID-19 pandemic. The changes to the depreciation rules for QIP present the possibility for taxpayers to obtain refunds for the 2018 tax year, reduced rates for the 2019 tax year, and for corporations, possible refunds for tax years going back to 2013.