Nonresidential property improvements may now qualify for bonus depreciation

Owners of Qualified Improvement Property (QIP) may be able to take advantage of 15 depreciation and 100 percent bonus depreciation.

The recently passed Coronavirus Aid, Relief, and Economic Security (CARES) Act fixed what was known as the “retail glitch” in the Tax Cuts and Jobs Act of 2017 (“TCJA”) which, due to a drafting error, assigned QIP a 39-year class life.

The CARES Act retroactively assigns a 15-year recovery period to QIP placed in service after December 31, 2017, and the improvements qualify for 100 percent bonus depreciation if the work meets all bonus requirements.

QIP is broadly defined as an internal improvement to nonresidential real property but does not include improvements related to elevators and escalators, the internal structural framework, or an enlargement of the building.

The improvement must be in place after the date the improved building was placed in service. The taxpayer must make the improvements. Therefore, the 15-year recovery period and bonus depreciation do not apply to a taxpayer that purchases a building that includes qualified improvement property depreciated by the seller over 15 years.

Options to correct previously filed returns

Taxpayers that treated QIP as 39-year property now have the opportunity to correct the prior year returns to treat QIP as 15-year property or take bonus depreciation.

IRS Revenue Procedure 2020-25 was recently released, setting forth the options.  If a taxpayer has filed two more returns using the 39-year recovery period, you must use IRS Form 3115 to correct the initial filing.

A taxpayer who only filed one return using a 39-year recovery period may file an amended return to correct the recovery period or may file Form 3115 with their current year return.  The change in accounting method is an automatic change with no filing fee.

When an amended return is filed (including an amended IRS Form 1065) for the placed in service year to correct the QIP depreciation period and/or claim bonus depreciation, the amended return is due on or before October 15, 2021, but not later than the applicable period of limitations on assessment.

Certain partnerships subject to the centralized audit regime may file an administrative adjustment request (AAR) by October 15, 2021.

Other under 2020-25

Rev. Proc. 2020-25 also allows taxpayers to make or revoke various elections whether or not directly related to QIP. These elections and revocations may be made on an amended return or Form 3115 and apply to a tax year ending in 2018, 2019, or 2020.

Taxpayers may make a late election or revoke a prior election made concerning depreciable property placed in service during a tax year ending in 2018, 2019, or 2020 tax year. The return must have been timely filed and filed before April 17, 2020. These elections and revocations are not limited to qualified improvement property.

The covered elections are:

• Election to use the MACRS alternative depreciation system (ADS)
• Election to claim bonus depreciation on specified plants in the year of planting or rafting
• Election out of bonus depreciation for a class of property
• Election to claim bonus depreciation at the 50 percent rate in place of the 100 percent rate for all bonus depreciation property placed in service in a tax year that includes September 28, 2017

You can file an amended return or change in the accounting method in Form 3115 to authorize the late election or revocation of election. Taxpayers may file an amended return for the placed-in-service year of the property by October 15, 2021 to make or revoke these elections.

Taxpayers choosing to file form 3115 to make or revoke these elections need to include:

• A timely filed original income tax return for the first or second tax year after the tax year in which the property was in service, or
• A timely filed original income return filed on or after April 17, 2020 and on or before October 15, 2021.

Moving forward

Rev. Proc. 2020-25 provides the roadmap for correcting the depreciable life and taking advantage of bonus depreciation for previously filed returns, which include QIP. It also creates a simplified process to make various depreciation elections for those years.

Taking advantage of the opportunities presented by Rev. Proc. 2020-25 can be complicated, and you should contact your tax advisor. Boyer & Ritter is ready to answer your questions on QIP or about depreciation elections currently available through amended returns or changes in accounting methods.