On March 27, 2020, when the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) rolled out, many taxpayers were anxious to receive the monetary benefit of the economic impact payments ( e.g stimulus checks). While the payments put much-needed money in the hands of many taxpayers, the bill also contained another provision that put money in the hands of taxpayers. This particular provision has an impact on depreciation and on how the IRS construes improvements made by tenants. This provision is really important for real estate investors and property owners alike. Without further adieu, I present to you, the one and only Qualified Improvement Property (or QIP for short)! Let's take a closer look at what exactly QIP is and how it works.
Qualified Improvement Property
Qualified Improvement Property is the consolidated name for the tax classification of assets that fall into the following categories of QIP assets:
- A qualified leasehold improvement property. Qualified leasehold improvements are improvements made to the interior of commercial property (nonresidential real property) that meet the following conditions:
- Made under a lease by a renter, a person subject to a sublease or person who leases the commercial property.
- Must be set out for occupancy by the renter or person subject to a sublease.
- Must be placed in service more than three years after the building was placed in service.
- A qualified restaurant improvement property. A qualified restaurant improvement is an improvement to property in which more than 50 percent of the building's use is devoted to preparation and seating for on-premises consumption of prepared meals.
- A qualified retail improvement property. A qualified retail improvement is an improvement to the interior of a commercial building that's open to the general public and used in the retail trade or business of selling tangible personal property to the general public.
Now that QIP has been consolidated, QIP is any improvement made by the taxpayer to an interior portion of a building that is nonresidential real property; the improvement must be placed in service after the building was first placed in service.
There you have it, QIP! Now that we know what property and improvement types fall under QIP, we should also note that like most rules, this one comes with a few exceptions. Let’s take a look.
Not included in QIP
- The enlargement of the building.
- Any elevator or escalator or improvement to the internal structural framework of the building.
- Roofs, HVAC, fire protection systems, alarm systems, and security systems.
How does QIP work?
In prior years, the tax provisions surrounding QIP were not as beneficial as they are now. This is because of the so-called 'retail glitch' that was baked into the Tax Cut and Jobs Act. When lawmakers drafted this provision, instead of denoting QIP as 15-year property and thus eligible for 100 percent bonus depreciation, lawmakers made a drafting error and gave QIP a depreciable life of 39 years.
Thankfully, the CARES Act made a correction to the provision. As a result of the correction, QIP assets obtained after September 27, 2017, and placed in service after December 31, 2017, are eligible for 100 percent bonus depreciation.
Note: Although QIP is eligible for bonus depreciation at the federal level, taxpayers should review their local rules to determine whether or not their state is in conformity with the federal guidelines.
Not only is the provision corrected, but taxpayers are also now able to use this provision retroactively and potentially claim a tax refund.
To use this provision retroactively, taxpayers should take the following steps:
- File an amended return. Taxpayers can use IRS Form 1040 X to file an amended return.
- File Form 3115, Application for Change in Accounting Method. Taxpayers can use IRS Form 3115 to revoke their previous election or file a late election for tax years 2018, 2019, or 2020 for a limited period of time.
- Administrative adjustment request. An Administrative Adjustment Request can be made one of two ways: electronically or by filing by paper. To learn more about how to make this request, impacted taxpayers should contact their tax advisor.
Note: Taxpayers have until October 15, 2021, (if an extension was filed) to claim a refund for their 2017 taxes.
The Millionacres bottom line
The CARES Act made a number of changes to the tax code, and this is one of the provisions real estate investors should look into thoroughly. Now that the CARES Act has corrections to the QIP provisions, eligible taxpayers should consult their tax advisor immediately; there could potentially be a tax refund in store!