Congress made an error in the TCJA that limited your ability to fully expense your qualified improvement property (QIP).
The CARES Act fixed the issue retroactively to tax year 2018.
If you have such property in your prior filed 2018 or 2019 tax returns, you likely have no choice but to correct those returns. But the bright side is that the corrected law gives you options that enable you to pick the best tax result.
What Is QIP?
QIP is any improvement made by the taxpayer to the interior portion of a building that is non-residential real property (think office buildings, retail stores, and shopping centers) if you place the improvement in service after the date you place the building in service.
The CARES Act correction added the “made by the taxpayer” requirement to the definition.
QIP does not include any improvement for which the expenditure is attributable to
- the enlargement of the building,
- any elevator or escalator, or
- the internal structural framework of the building.
Due to a TCJA drafting error in the law, Congress made QIP 39-year property for depreciation purposes and ineligible for bonus depreciation.
Unusual twist. This drafting error did not affect expensing under Section 179. Under the TCJA, you could have elected to expense some or all of your QIP with Section 179.
But now you have to revisit your previously filed 2018 and 2019 tax returns and consider 100 percent bonus depreciation, 15-year depreciation, and Section 179 expensing.
The CARES Act made QIP 15-year property and made it eligible for bonus depreciation retroactively as if Congress had included it in the TCJA when it originally became law.
This change requires you to take a one-time, lump-sum bonus depreciation deduction for the entire cost of your QIP in the tax year during which you place the QIP in service, unless you elect out.
If the QIP lump-sum deduction creates an NOL, you can carry back that loss to get almost immediate cash.