On Friday, March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law by President Trump in an effort to provide economic relief in the wake of the COVID-19 (Coronavirus) pandemic. Below, we outline the changes to bonus depreciation for qualified improvement property.
- Prior to the rules passed in the Tax Cuts and Jobs Act qualified improvement property (QIP) was depreciated as 39-year real property unless it separately qualified as 15-year qualified improvement property, 15-year retail improvement property or 15-year restaurant property.
- As part of the Tax Cuts and Jobs Act, Congress eliminated the three separate categories mentioned above with the intention to make all qualified improvement property, 15-year property.
- Although the Tax Cuts and Jobs Act included 100% bonus depreciation rules that applied to Modified Accelerate Cost Recovery System (MACRS) property with a recovery period of 20 years or less, due to a drafting error, the Act failed to accurately categorize qualified improvement property as 15-year property. It was instead depreciable over 39 years and ineligible for bonus depreciation.
- The CARES Act made the technical correction of the drafting error and allows taxpayers to claim 100% bonus depreciation on expenses incurred to make qualified improvements to the physical property or premises related to the business.
- Property acquired and placed in service after September 27, 2017 is eligible for the technical correction. This will provide cash flow benefits and relief to taxpayers.
- Taxpayers that placed QIP into service in 2019, can claim 100% bonus depreciation on these expenditures on their 2019 return.
- Taxpayers that place QIP in service between September 27, 2017 and December 31, 2017 or in 2018 should consider amending that return to treat such assets as bonus eligible.
- Additional procedural guidance is needed to clarify whether an automatic change in accounting method (Form 3115) can be filed with the 2019 return to take advantage of the new favorable treatment and claim the missed depreciation for 2018 as a favorable Section 481(a) adjustment. Although a return can be amended to claim the missed QIP deductions, in the case of a pass-through entity with many owners, it may not be practical to do so.
- A C corporation claiming bonus depreciation on an amended return can potentially generate net operating losses that can be carried back five years to when the tax rates were 35%, even though the carryback losses were generated in years when the tax rate was 21%.
If you have questions about the changes to bonus depreciation caused by the CARES Act, please reach out to your personal Sciarabba Walker contact or email us at firstname.lastname@example.org.