Qualified Improvement Property (QIP)

As many of you may recall, Congress made a technical error when drafting the Qualified Improvement Property (QIP) section of the CARES Act. Qualified Improvement Property (QIP) is defined as any improvement to an interior portion of a building which is nonresidential real property if the improvement is placed in service after the date the building was first placed in service by any taxpayer.  This drafting error, referred to as the “retail glitch,” intended QIP to be defined as 15-year property eligible for bonus depreciation. However, the law was incorrectly written and QIP was defined as 39-year property, making it ineligible for bonus depreciation.

On March 27th, 2020, the CARES Act repealed provisions enacted as part of the Tax Cuts and Jobs Act (TCJA) of 2017 and amended the previous drafting error. The new qualifications allow for the Internal Revenue Code to define (QIP) as 15-year property, and the Alternative Depreciation System (ADS) recovery period has been updated to 20 years.

QIP is now eligible for 100% bonus depreciation or shorter depreciable lives. With this legislation, businesses with commercial real estate holdings may immediately write-off expenses incurred to improve the interiors of non-residential buildings as 100% bonus depreciation rather than depreciating those costs over 39 years.

The CARES Act adds language to state that the improvement must be made by the taxpayer. This requires clarification as to whether a landlord that gives a tenant a work letter for improvements and doesn’t actually make the improvements will qualify, or whether the added language was to distinguish between improvements made by the current owner versus those made by the previous owner.

The change is retroactive to Jan. 1, 2018. The retroactive nature of the CARES Act provision presents opportunities for tax refund claims as well.